I^Vj \ S. Hrg. 104-477
ABUSES IN FEDERAL STUDENT GRANT PROGRAMS
PROPRIETARY SCHOOL ABUSES
Y 4. G 74/9: S, HRG, 104-477
Abuses in Federal Student Grant Pro...
HEARING
BEFORE THE
PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS
OF THE
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
JULY 12, 1995
Printed for the use of the Committee on Governmental Affairs
^ uuMGiiiitendeni of Oociimems i
DEPOS!TORy
1 ^^ '^M^6
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1996
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-052791-0
\\j \ S. Hrg. 104-477
ABUSES IN FEDERAL STUDENT GRANT PROGRAMS
PROPRIETARY SCHOOL ABUSES
Y 4. G 74/9: S, HRG, 104-477
Abuses in Federal Student Grant Pro...
HEARING
BEFORE THE
PER]VIANENT
SUBCOMMITTEE ON INVESTIGATIONS
OF THE
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
JULY 12. 1995
Printed for the^se of the Committee on Governmental Affairs
^uMi;r iiitendent ofTJocumSms^
DEPOSITORY 1
I AUG 0 J49i8S
I Boston - -'^y
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1996
For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-052791-0
COMMITTEE ON GOVERNMENTAL AFFAIRS
WILLIAM V. ROTH, Jr., Delaware, Chairman
TED STEVENS, Alaska JOHN GLENN, Ohio
WILLIAM S. COHEN, Maine SAM NUNN, Georgia
FRED THOMPSON, Tennessee CARL LEVIN, Michigan
THAD COCHRAN, Mississippi DAVID PRYOR, Arkansas
CHARLES E. GRASSLEY, Iowa JOSEPH I. LIEBERMAN, Connecticut
JOHN MCCAIN, Arizona DANIEL K. AKAKA, Hawaii
BOB SMITH, New Hampshire BYRON L. DORGAN. North Dakota
Franklin G. Polk, Staff Director and Chief Counsel
Leonard Weiss, Minority Staff Director
Michal Sue Prosser, Chief Clerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
WILLIAM V. ROTH, Jr., Delaware, Chairman
TED STEVENS, Alaska SAM NUNN, Georgia
WILLIAM S. COHEN, Maine JOHN GLENN, Ohio
FRED THOMPSON, Tennessee CARL LEVIN, Michigan
THAD COCHRAN, Mississippi DAVID PRYOR, Arkansas
CHARLES E. GRASSLEY, Iowa JOSEPH I. LIEBERMAN, Connecticut
JOHN McCain, Arizona DANIEL K. AKAKA, Hawaii
BOB SMITH. New Hampshire BYRON L. DORGAN. North Dakota
Harry Damelin, Chief Counsel
Dan Gelber, Chief Counsel to the Minority
Carla Martin. Chief Clerk
CONTENTS
Opening statements: Page
Senator Roth 1
Senator Nunn 3
WITNESSES
Wednesday, July 12, 1995
Alan Edelman, Counsel to the Minority, and R. Mark Webster, Staff Inves-
tigator to the Minority, Permanent Subcommittee on Investigations, U.S.
Senate 6
David A. Longanecker, Assistant Secretary for Postsecondary Education, U.S.
Department of Education; accompanied by Donald R. Wurtz, Chief Finan-
cial Officer 33
John P. Higgins, Jr., Acting Inspector General, U.S. Department of Edu-
cation 43
Cornelia Blanchette, Associate Director, Education and Employment Issues,
Health, Education, and Human Services Division, U.S. General Accounting
Office; accompanied by Joseph J. Eglin, Assistant Director 50
Alphabetical List of Witnesses
Blanchette, Cornelia:
Testimony 50
Prepared statement 139
Edelman, Alan
Testimony 6
Prepared statement 63
Higgins, John P. Jr.:
Testimony 43
Prepared statement 126
Longanecker, David A.:
Testimony 33
Prepared statement 114
Webster, R. Mark:
Testimony 6
Prepared statement 63
APPENDIX
Prepared statements of witnesses in order of appearance 63
(III)
EXHIBIT LIST
Page
1. Statement for the Record of Representative Bart Gordon (D-TN), dated -
July 11, 1995 145
2. Letter for the Record of Barbara B. Gregg, Director, Office of Consumer
Affairs, Montgomery Country Government, Rockville, Maryland, dated
July 28, 1995 148
3. Letter for the Record of Donald J. Nolan, Deputy Commissioner for
Higher Education and the Professions, New York State Education De-
partment, dated July 18, 1995 151
4. Memorandum from Ken Williams, Director of Financial Aid, lADE,
dated July 14, 1994, to Abraham, Sergio, Bernardo and Alex
Stofenmacher and Gonzalo Freixes, regarding "Current Refunds" 154
5. a. Video Deposition conducted by the Permanent Subcommittee on In-
vestigations on July 5, 1995 of Ken Williams, Director of Financial
Aid, lADE *
b. Excerpts of Video Deposition conducted by the Permanent Sub-
committee on Investigations on July 5, 1995 of Ken Williams, Director
of Financial Aid, lADE. (Excerpts presented at July 12, 1995 Perma-
nent Subcommittee on Investigations' hearing.) *
c. Transcript of excerpts of Video Deposition conducted by the Perma-
nent Subcommittee on Investigations on July 5, 1995 of Ken Wil-
liams, Director of Financial Aid, lADE. (Excerpts presented at July
12, 1995 Permanent Subcommittee on Investigations' hearing.) 157
6. Memorandum to Mark Webster, Investigator, Permanent Subcommittee
on Investigations, dated June 1, 1995, from Arnaldo Sanchez, regarding
1993 ACCET inspection of lADE Oxnard campus 162
7. Complaint for Damages, Maria McFarlane vs. lADE American Schools,
et al., Superior Court of California, County of Los Angeles, Central
District *
8. Affidavit of Jorge E. Shepherd, made to the Permanent Subcommittee
on Investigations, dated December 21, 1994, regarding lADE 163
9. Affidavit of Augusto V. Guerra, made to the Permanent Subcommittee
on Investigations, dated December 21, 1994, regarding lADE 167
10. Selected Corporate charge account statements for lADE American
Schools, 1991-1994 *
11. Various signed vehicle lease agreements for lADE American Schools,
1991-1994 *
12. Selected documents pertaining to U.S. Department of Education deter-
mination of eligibility for lADE American Schools, Southgate, Califor-
nia, 1989-1990 *
13. a. Letter to lADE American Schools, dated September 28, 1992, from
the U.S. Department of Education, transferring lADE American
Schools to reimbursement system of payment *
b. Letter to lADE American Schools, dated January 26, 1993, from
the U.S. Department of Education, transferring lADE American
Schools from reimbursement system of payment to the advance fund-
ing system *
c. Letter to U.S. Department of Education, dated June 28, 1994, from
lADE American Schools, regarding "Consent Agreement for the Re-
turn of lADE American Schools to Advance Payment Status" *
14. Letter to Ken Williams, Corporate Director of Student Financial Aid,
lADE American Schools, dated February 11, 1992, from U.S. Depart-
ment of Education, regarding entrance conference for March 1992 De-
partment of Education Audit *
15. a. U.S. Department of Education September/October 1992 Program Re-
view Report of lADE American Schools *
(IV)
Page
b. Correspondence between lADE American Schools and the U.S. De-
partment of Education, dated November 1992-March 1994, regarding
September/October 1992 Program Review Report *
16. a. Draft Audit Report of lADE American Schools for the audit period
July 1989 through March 1992, prepared by the U.S. Department
of Education Office of Inspector General *
b. Final Audit Report of lADE American Schools for the audit period
July 1989 through March 1992, prepared by the U.S. Department
of Education Office of Inspector General *
c. SEALED EXHIBIT: Report of Investigation of lADE American
Schools, dated July 9, 1993, prepared by U.S. Department of Edu-
cation Office of Inspector General *
17. Summary Listing of Investigative Management and Policy Changes Im-
plemented Since 1992, prepared by the U.S. Department of Education
Office of Inspector General *
18. U.S. Department of Education Office of Inspector General Audits:
a. Financial Analysis Certification Process Not Adequate to Protect Stu-
dents and Government (Audit Control Number 11-80160), September
1989 *
b. Accrediting Agency Recognition Process Does Not Serve as an Effec-
tive Control in Determining the Reliability of Agencies that Accredit
Numerous Problem Schools (Audit Control Number 11-90050), Feb-
ruary 1991 *
c. Administrative Certification Process Does Not Adequately Assure that
All Schools are Capable of Administering Title IV Funds (Audit Con-
trol Number 11-00012), March 1991 *
d.The Institutional Eligibility Process Does Not Provide Adequate As-
surance that Only Eligible Schools Participate in the Title IV Pro-
grams (Audit Control Number 11-90040), March 1991 *
19. Draft Financial Statement Analysis of lADE Corporation for the fiscal
years 1990-1992, prepared by Oscar Sendowsky (FY 1990), BDO
Seidman (FY 1991), and Lowenthal, Goldring & Co. (FY 1992) *
20. Letter to lADE American Schools, dated August 25, 1994, from U.S.
Department of Education, regarding final audit determination of audit
report for period July 1, 1989 through June 20, 1991 *
21. Letter to U. S. Department of Education, dated July 5, 1995, from
lADE American Schools, regarding May 19, 1995 Final Audit Deter-
mination for lADE American Schools *
22. Department of Education Office of Inspector General Draft Report,
dated June 15, 1995, entitled The Department Should Consider State
Workforce Development Initiatives in its Efforts to Reform Title IV Fund-
ed Job Training *
23. Correspondence between Permanent Subcommittee on Investigations
and Mary Gibbons, Esquire, counsel to lADE American Schools, dated
June 20, 1995 and July 3, 1995, regarding appearance of Bernardo
Stofenmacher before the Subcommittee pursuant to Subcommittee sub-
poena , 171
24. a. SEALED EXHIBIT: Letter to the Permanent Subcommittee on Inves-
tigations from confidential source regarding lADE American Schools *
b. SEALED EXHIBIT: Reports from Dunn & Bradstreet Information
Services relating to lADE American Schools *
25. Proposed Consumer and Student Protection Legislation Regarding Un-
paid Refunds to Student, prepared by California Council for Private
Postsecondary and Vocational Education *
26. Minutes of August 10, 1995 meeting of California Council for Private
Postsecondary and Vocational Education (CPPVE), U.S. Department
of Education Institutional Review Branch, and U.S. Department of Edu-
cation Office of Inspector General *
27. Letter to Roger Williams, President, Accrediting Council for Continuing
Education & Training (ACCET), dated March 2, 1995, from Abraham
Stofenmacher, President, lADE American Schools, regarding February
3, 1995 ACCET team visit exit interview 174
28. Statement for the Record of Deanne Loonin, Staff Attorney, Bet Tzedek
Legal Services, Los Angeles, California, dated May 24, 1995 179
VI
Page
29. Letter to Dan Gelber, Chief Counsel to the Minority, Permanent Sub-
committee on Investigations, dated June 5, 1995, from David A.
Longanecker, Assistant Secretary of Education for Postsecondary Edu-
cation, regarding activities of the Office of Postsecondary Education *
30. Correspondence between R. Mark Webster, Investigator, Permanent
Subcommittee on Investigations, and Ehot R. Long, Vice President,
Wonderlic Personnel Test, Inc., dated August 10 and 19, 1994, regard-
ing administration of Wonderlic Scholastic Level Exam *
31. Correspondence between Wonderlic Personnel Test, Inc. and Gladys
Canovil, lADE American Schools, dated December 23 and 29, 1994,
regarding termination and/or probation of independent test administra-
tor's registration for various lADE employees *
32. U.S. Department of Education's Cash on Hand Reconciliation Spread-
sheet per Fiscal Year for LADE American Schools, covering period II
1/74-6/30/95 183
33. Federal Cash Transaction Reports for lADE American Schools, covering
periods 1/1/92-3/31/92 and 10/1/93-1/31/95 *
34. Letter, with attachments, to R. Mark Webster, Investigator, Permanent
Subcommittee on Investigations, dated June 26, 1995, from Jeanne
B. Saunders, Director, Application and Pell Processing Systems Divi-
sion, U.S. Department of Education, regarding schools with Pell Grant
funding equal to or greater than lADE American Schools for the years
1989-1995 (attachments retained in the files of the Subcommittee) 193
35. Letter, with attachments, to R. Mark Webster, Investigator, Permanent
Subcommittee on Investigations, dated June 16, 1995, from Jeanne
B. Saunders, Director, Application and Pell Processing Systems Divi-
sion, U.S. Department of Education, regarding Pell Grant authoriza-
tions by school type and state for the years 1992-1995 *
36. Letter, with attachments, to R. Mark Webster, Investigator, Permanent
Subcommittee on Investigations, dated July 10, 1995, from Jeanne B.
Saunders, Director, Application and Pell Processing Systems Division,
U.S. Department of Education, regarding Pell Grant Data for beauty
and cosmetology schools for the year 1994-95 *
37. Letter to R. Mark Webster, Investigator, Permanent Subcommittee on
Investigations, dated May 16, 1995, from Mary Gibbons, Esq., attorney
for lADE American Schools, regarding deposition of Bernardo
Stofenmacher pursuant to Subcommittee subpoena 195
38. Letter to Permanent Subcommittee on Investigations, dated July 11,
1995, from Mark Karalla, M.D., Tarzana, California, regarding inability
of Bernardo Stofenmacher to travel due to medical condition of his
spouse 197
39. Letter to Senator Sam Nunn from David A. Longanecker, Assistant
Secretary of Education for Postsecondary Education, regarding addi-
tional material to be included in Subcommittee's hearing record 199
40. Report, U.S. General Accounting Office, Student Financial Aid: Data
Not Fully Utilized to Identify Inappropriately Awarded Loans and
Grants (GAO/HEHS-95-89), July 1995 *
41. Responses of John P. Higgins, Jr., Acting Inspector General, U.S. De-
partment of Education, to Permanent Subcommittee on Investigations'
additional questions for the record 205
42. Responses of David A. Longanecker, Assistant Secretary for Post-sec-
ondary Education, U.S. Department of Education, to Permanent Sub-
committee on Investigations' additional questions for the record 211
43. Memorandum to Permanent Subcommittee on Investigations, dated
July 12, 1995, from Rose Miller, Administrator, Georgia State Post-
secondary Review Entity, regarding administration of Title IV programs
with particular reference to Pell Grants and the State Postsecondary
Review Program 228
44. Letter to Senator William V. Roth, Jr., dated July 8, 1995, from Richard
R. Harvey, Executive Director, Patricia Stevens College, regarding eval-
uation of quali'v of proprietary school education 229
45. Letter to Mary E. Kurutz, New York State Education Department,
dated July 7, 1995, from Kenneth Waters, Chief, State Liaison Branch,
Accreditation and State Liaison Division, U.S. Department of Edu-
cation, regarding present referral status of certain postsecondary insti-
tutions in New York State *
VII
Page
46. Letter to Geneva Coombs, Acting Chief, Default Management Section,
U.S. Department of Education, dated October 6, 1993, from Abraham
Stofenmacher, President, lADE American Schools, regarding lADE's
voluntary withdrawal from Federal Family Education Loan Programs 236
47. SEALED EXHIBIT; Various internal Department of Education docu-
ments regarding actions taken lADE American Schools, covering period
June 1992-April 1995 .. *
48. SEALED EXHIBIT: Various documents related to a qui tam action
filed against lADE American Schools *
49. a. Reviewed Financial Statements of lADE American Schools for the
period ending January 31, 1991, prepared by Oscar Sendowsky, CPA *
b. Reviewed Financial Statements of lADE American Schools for the
period ending January 31, 1992, prepared by BDO Seidman *
c. Reviewed Financial Statements of lADE American Schools for the
period ending December 31, 1993, prepared by Lowenthal, Goldring
& Co., CPA ^ *
d. Financial Statements of lADE American Schools for the period ending
January 31, 1993, revised July 25, 1993 *
e. Report and Financial Statements of lADE American Schools for the
twelve months ending December 31, 1993 and the twelve months
ending January 31, 1993, prepared by Lowenthal, Goldring & Co.,
50. a. Independent Audit of SFA Modified Statement of Cash Receipts and
Disbursements of lADE American Schools for the years ended June
30, 1991 and June 30, 1990, prepared by Barry Glasser, CPA *
b. lADE American Schools' Corrective Action Plan and Response to Bi-
ennial Audit for the years ended June 30, 1991 and June 30, 1990 *
51. SEALED EXHIBIT: Summary of Review of Financial Documents of
lADE American Schools as of September 29, 1994, prepared by U.S.
General Accounting Office *
52. Selected documents pertaining to the accreditation of lADE American
Schools by the Accrediting Council for Continuing Education and Train-
ing (ACCET), for the period September 1989-March 1995 *
53. Selected documents pertaining to audits of lADE American Schools
conducted by the California Council for Private Postsecondary and Vo-
cational Education (CCPPVE), for the period May 1993-^anuary 1995 *
54. Statement for the Record of Les Cochran, Manager, Consumer and
Student Protection, California Council for Private Postsecondary and
Vocational Education (CCPPVE), dated June 5, 1995 .... 238
55. SEALED EXHIBIT: Selected student records from lADE American
Schools pertaining to no-show students *
56. SEALED EXHIBIT: Selected financial documents pertaining to cor-
porate officers of lADE American Schools *
^Retained in the files of the Subcommittee.
ABUSES IN FEDERAL STUDENT GRANT
PROGRAMS PROPRIETARY SCHOOL ABUSES
WEDNESDAY, JULY 12, 1995
U.S. Senate,
Permanent Subcommittee on Investigations,
OF THE Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:35 a.m., in room
SD-342, Dirksen Senate Office Building, Hon. William V. Roth, Jr.,
Chairman of the Subcommittee, presiding.
Present: Senators Roth and Nunn.
Staff Present: Daniel Gelber, Minority Chief Counsel; John
Sopko, Minority Deputy Counsel; Mary Robertson, Assistant Chief
Clerk; Alan Edelman, Minority Counsel; R. Mark Webster, Minor-
ity Investigator; Scott Newton, Minority Investigator; Harold
Damelin, Chief Counsel; Carla Martin, Chief Clerk; Christopher
Greer, Investigator; Sue Horner, Librarian; Jack Cobb, Counsel;
Michael Bopp, Counsel; Lee Mitchell, Minority Intern; Deval R.
Karina Zaveri, Minority Intern; Brian Dettelbach (Senator Glenn);
Cathy O'Brien (Senator Nunn); Mary Ailes; Ariadne Allen; Tim
Dudderer; Jim Taylor; and Richard Keenan.
OPENING STATEMENT OF SENATOR ROTH
Chairman RoTH. The Subcommittee will please be in order.
This morning, the Permanent Subcommittee on Investigations
continues to probe the problems that persist in the Department of
Education's Pell Grant program. We will hear today about the
fraud and abuse that continue to plague one of our Government's
most well-intentioned programs. I commend the distinguished
ranking member. Senator Nunn, and his staff for their fine efforts
in exposing these problems.
Through previous hearings, this Subcommittee has revealed that
unscrupulous individuals have defrauded various Federal student
aid programs literally of millions and millions of dollars. By clever
schemes and lax Federal enforcement policies, these crooks have
been able to manipulate the system and steal our money.
It was only 2 years ago that this Subcommittee convened to ex-
amine Pell Grant abuses in certain Yeshiva schools in New York
City. The fraud that was discovered was startling, but just as star-
tling was the ineffective oversight by the Department of Education
that allowed the fraud to continue. At that time, we were assured
by representatives from the Department of Education that nec-
essary steps were being taken to curb the abuses in the Pell Grant
program. While I do not doubt that certain good-faith efforts have
(1)
been made in this regard, our presence here today indicates that
the Department has not done enough.
This morning, we will revisit the area of Pell Grant abuses by
focusing specifically on the actions of lADE American Schools.
lADE is a for-profit vocational school that has campuses in the L.A.
area, and as we will learn today, the owners of the school, who are
not even citizens of the United States, defrauded the Pell Grant
program of millions of dollars. They managed to do this even
though the Department of Education audited the school in 1992 to
ensure that it was pla3ring by the rules of the game. Remarkably,
the Department gave lADE a clean bill of health and never pre-
vented the school from receiving Pell Grant money. The Depart-
ment's failure to uncover the ongoing fraudulent activities at LADE
cost taxpayers millions of dollars.
This Subcommittee has illuminated many instances of abuse in
Federal student aid programs, but we will never see true progress
until the Department's gatekeeping and enforcement mechanisms
are improved. In our past hearings on student aid, we remarked
that because of ineffectual oversight, aspects of the Federal Gov-
ernment's student aid programs have appeared to be policed by lit-
tle more than an honor system.
This hearing serves to remind us of the old adage that there is
no honor among thieves, even among thieves who hold themselves
out as educators and administrators. The question I want the De-
partment to answer for us today is why does the Department seem
to have so much difficulty catching them?
Congress must try to ensure that the Department of Education
diligently roots out unscrupulous individuals who masquerade as
educators in order to defraud our student aid programs. This is the
only way we can be sure that every dollar of Federal student aid
goes to legitimate students who seek an education from legitimate
educators. Unfortunately, it seems clear that the Department has
not succeeded in this task as well as it should have.
The Department's problems stem at least in part from its own
managerial structure. The Department has unwisely divided the
task of awarding and administering Pell Grants among three dif-
ferent units within its own Office of Postsecondary Education. This
arrangement makes it impossible to pinpoint who is responsible for
overseeing the effectiveness of the program. It would be far better
if the Department clarified who holds responsibility for the pro-
gram because the buck must stop somewhere. As Congress has said
repeatedly, when Government fails to maintain accountability.
Government's effectiveness is invariably compromised.
Today's hearing will reveal problems which persist in our Pell
Grant program. It is my hope that the Subcommittee can continue
to work with the Department to correct these problems, thus ensur-
ing that the future of our students and the dollars of our taxpayers
are adequately protected.
Unfortunately, my role in the regulatory reform bill which is cur-
rently on the Senate floor will cause me to miss much of today's
hearing. Senator Nunn, since you have taken the lead on this most
important investigation, I would ask you to Chair the hearing in
my absence.
OPENING STATEMENT OF SENATOR NUNN
Senator Nunn [presiding]. Thank you very much, Mr. Chairman,
and we appreciate all of your splendid cooperation and that of your
staff.
I will apologize to all who are listening today about my voice. I
have had a summer cold go directly to my throat. I do not feel as
bad as I sound, if that makes you any more comfortable.
Five years ago, Mr. Chairman, the Subcommittee began a series
of hearings examining the operation of the Federal guaranteed stu-
dent loan program. Those hearings uncovered widespread fraud
and abuse on the part of many key participants in the loan pro-
gram, and also revealed serious deficiencies in the role played by
the Department of Education in administering and overseeing that
program.
As a result of those hearings, the Subcommittee issued a report
in 1991 entitled "Abuses in Federal Student Aid Programs," which
was highly critical of almost every aspect of the administration and
operation of the loan program. The report contained over 25 sepa-
rate recommendations for reform, many of which were ultimately
incorporated into the 1992 amendments to the Higher Education
Act.
In 1993, the Subcommittee held its first hearing on the Federal
Pell Grant program. That hearing revealed that the Pell Grant pro-
gram was being undermined by many of the same systemic weak-
nesses that plagued the student loan program, and that those
weaknesses undercut the ability of the Government to deter, detect,
and pursue fraud and abuse by program participants. In particular,
the Subcommittee discovered that the Department's gatekeeping
and program review functions were woefully inadequate and inef-
fective.
These inadequacies were particularly troublesome with respect to
the Pell Grant program because apart from strong and continuous
oversight, there are not the types of indicators in the Pell program
as there are in the loan program to alert one to the possibility of
ongoing abuse. For instance, when students have no repayment ob-
ligation, they are less likely to complain about the lack of quality
of the education that they receive. In addition, the lack of a repay-
ment obligation means that there will be no defaults, which within
the loan system have often been a key indicator of problematic in-
stitutions.
At the same time, however, the Subcommittee's 1993 hearing ap-
peared to give at least some reason for optimism. The Subcommit-
tee heard from the new administration of the Department of their
candid acknowledgement of past failures and their commitment to,
"make the program work better and frustrate the efforts of those
who would abuse it."
Dr. David Longanecker, Assistant Secretary for Postsecondary
Education, testified at that hearing as to the Department's efforts
to strengthen its gatekeeping and monitoring functions and to en-
hance their efficiency. He also promised the Subcommittee "a lot
better management," and expressed the hope that he would come
back in a year or two to demonstrate that he has fulfilled that
promise.
Here we are 2 years later, and we will indeed be providing Dr.
Longanecker an opportunity to discuss the Department's manage-
ment, and I have read his opening statement and I will say that
there are significant plans that are being announced this morning
by the Department to deal with some of these abuses.
Unfortunately, that discussion will be taking place in the context
of yet another major failure on the part of the Department, a fail-
ure which led to almost $58 million of taxpayer money going to- a
school that was little more than a Pell Grant mill. Moreover, it ap-
pears that the abuses of this school continued for a number of
years right under the noses of Department of Education reviewers,
auditors, and investigators who were on the site conducting exami-
nations of the school while the misconduct was going on.
Today, the Subcommittee will hear from the staff on its year-long
investigation of lADE Schools. lADE was a Los Angeles-based pro-
prietary school which offered short-term certificate-granting pro-
grams in computer operations, professional tractor trailer driving,
and automobile repairs. In 1989, lADE was certified as eligible to
participate in Federal student aid programs, including the Pell
Grant program. In a little over 4 years, lADE's Pell Grant receipts
increased by over 1,700 percent. By the 1993-1994 award year,
lADE was the 16th largest recipient of Pell Grants of all schools
in the Nation.
The staff will report that lADE's primary concern was the maxi-
mization of Pell Grant funds and, regrettably, not the training and
placement of students. Among the findings the staff will report
today are that many lADE students, including some who could nei-
ther read nor write, were enrolled in lADE courses, in apparent
violation of Pell Grant ability-to-benefit requirements.
Instruction in lADE courses was woefully inadequate due to a
lack of books and equipment, unqualified instructors, and defi-
ciencies in course design and curriculum. In the vast majority of
cases, placement of students was either ineffective or non-existent,
and lADE officials deliberately covered up this fact by creating
false records designed to mislead Federal, State, and accrediting of-
ficials.
lADE was engaged in abusive and possibly fi-audulent practices,
including the falsification of student records, in order to obtain Pell
Grants for students who either had never attended or had with-
drawn. lADE's owners used the school's Pell Grant receipts for
such purposes as child support payments, leases on Mercedes Benz
and BMW automobiles, trips to Club Med, and purchases at Vic-
toria's Secret. lADE deceived and misled Federal, State, and ac-
crediting officials engaged in conducting official reviews of the
school's operations, policies, and procedures.
As disturbing as these findings are, unfortunately, they are not
uncommon among many short-term non-degree-granting propri-
etary trade schools. Almost every Semi-Annual Report of the De-
partment's Inspector General for the last few years has contained
at least 4 or 5 cases involving abuses of the Pell Grant program
among this sector of the educational community. Today, the Sub-
committee will, no doubt, hear of other instances from the Inspec-
tor General.
In our 1991 report on "Abuses in Federal Student Aid Programs,"
the Subcommittee found widespread abuse of the guaranteed stu-
dent loan program within the proprietary school sector and we rec-
ommended that Congress should consider the feasibility of setting
reasonable limits on the tjrpe of proprietary school education that
Federal dollars should subsidize. To date, such consideration has
not been undertaken. I think that has been a mistake. I believe the
time has come for the process to begin. In fact, it is overdue.
At a time when the Senate has passed a budget resolution which
calls for severe cuts in Federal student aid programs, we cannot
continue to suffer the waste of taxpayers' money on schools like
lADE. Every dollar of Pell Grant money which goes to illegitimate
and abusive schools results in a direct reduction of the funds avail-
able to needy students to obtain a truly worthwhile education. It
is time we stopped treating these schools the way we would treat
Emory University or the University of Delaware.
That is not to say that all proprietary schools, merely because of
their nature as for-profit institutions, are illegitimate or abusive.
Certainly, there are legitimate proprietary schools that are commit-
ted to providing their students with a quality education. By the
same token, the Subcommittee's hearings in 1993 revealed that
some non-profit institutions can also be abusive. Unfortunately,
there are too many institutions, the majority of which are for-prof-
it, that exist merely to take advantage of the Pell Grant and other
Federal student aid programs and that care little for the utility of
the training they provide. We cannot afford to subsidize such
schools with Federal funds.
While this hearing is important for the focus it brings to the par-
ticipation of questionable schools in Federal student aid programs,
it is also important for the focus it brings to the Department's man-
agement of these programs. As I stated earlier, this Subcommittee
had high hopes for the Department at our 1993 hearing. I stated
my hope that the new Education team would give this issue high
priority and that they would give the Department the strong lead-
ership and management which it so clearly lacked and so clearly
required.
That is why it is particularly disturbing to me to learn that the
regulatory system for which the Department is responsible is ap-
parently, based on this case, still incapable of either preventing
fraudulent institutions from gaining access to student aid programs
or of detecting and pursuing fraud by such institutions once access
has been gained.
As we will hear from the staff, during the 5 years that lADE par-
ticipated in Federal student aid programs, it was the subject of
over a dozen audits, examinations, investigations, and reviews con-
ducted by State licensing authorities, independent accrediting
agencies, independent certified public accountants, and the Depart-
ment of Education itself. At various times, lADE was found to owe
the Federal Government money for student funds it should not
have used. Yet, the school was never terminated from the aid pro-
gram until it voluntarily closed its doors and filed for bankruptcy
in March of this year, after our Subcommittee had been investigat-
ing for a number of months.
6
In conclusion, I would like to thank Chairman Roth and his staff
for the support they have given us for our continued pursuit of
these issues. These student aid programs are among the most im-
portant of all our Federal programs because of the opportunities
they provide to millions of young people to better their lives and
to be fully participating citizens in our political and economic sys-
tem.
I look forward to working with the Chairman and all members
of the Subcommittee to ensure that the focus of these programs re-
mains on these young people, and to do everything we can to en-
sure that both they and the taxpayers are protected.
Mr. Edelman and Mr. Webster, as you know, we swear in all the
witnesses before the Subcommittee, so I will ask you to take the
oath.
[Witnesses sworn.]
Senator NUNN. Why don't you proceed with your staff statement?
TESTIMONY OF R. MARK WEBSTER, STAFF INVESTIGATOR TO
THE MINORITY, AND ALAN EDELMAN, COUNSEL TO THE MI-
NORITY, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,
U.S. SENATE
Mr. Webster. Mr. Chairman, we have a very lengthy statement
this morning that we would like to summarize and include the full
statement in the hearing record.
Senator NuNN. Without objection, it will be.^
Mr. Webster. Mr. Chairman and members of the Subcommittee,
for the past 5 years now the staff has been reporting to the Sub-
committee on its investigation of problems with the management
and oversight of the Federal financial student aid programs. This
investigation began with an examination of the guaranteed student
loan program. That examination led to a series of hearings, begin-
ning in 1990, and culminated in the issuance of a 1991 Subcommit-
tee report which set forth what the Subcommittee termed over-
whelming evidence that the guaranteed student loan program, par-
ticularly as it relates to proprietary schools, is riddled with fraud,
waste, and abuse, and is plagued by substantial mismanagement
and incompetence.
The Subcommittee's report contained over 25 separate rec-
ommendations for reform of the loan program. Many of those rec-
ommendations were ultimately incorporated into amendments to
the Higher Education Act which were passed by the Congress and
signed into law by President Bush in 1992. The amendments were
designed, among other things, to tighten institutional eligibility
and to strengthen the triad of State licensure, independent accredi-
tation, and Federal certification.
Subsequent to the passage of these amendments, the staff under-
took an examination of the Federal Pell Grant program. With over
$6 billion awarded annually, the Pell Grant program is the largest
direct Federal student aid program. The staffs examination led to
hearings in 1993 which revealed that the Pell Grant program was
beset by many of the same systemic weaknesses that plagued the
student loan program.
See page 63.
In particular, the hearings focused on the failure of the Depart-
ment of Education's gatekeeping and program review procedures to
prevent or detect fraud and abuse. These failures were of particular
concern to the staff with respect to the Pell Grant program because
apart from strong and continuous oversight, the Pell Grant pro-
gram does not contain any structural indicators to alert one to the
possibility of ongoing abuse by program participants. Indeed, as the
Department's Inspector General put it during the hearings, the Pell
Grant program by its very design is vulnerable to fraud and abuse
because it operates essentially on the honor system.
The staff noted during the hearings that the Department's In-
spector General cited a number of proprietary trade schools in the
previous few years for abuses which involved tens of millions of
dollars. One, in particular, lADE American Schools, attracted the
attention of the staff and became the subject of our case study.
In 1992, lADE, facing the prospect of being disqualified from fur-
ther participation in Title IV programs as a result of a rising de-
fault rate on its student loans, voluntarily ceased processing stu-
dent loan applications for its students.
Senator NuNN. Mr. Webster, let me ask you this question. How
did you choose lADE?
Mr. Webster. Pretty much
Senator NuNN. Did you draw it out of a hat? Was there some sig-
nal that went off? Did somebody get in touch with you? Describe
how the choice was made to investigate this school?
Mr. Webster. Pretty much out of a hat, using some basic guide-
lines. We wanted to find a school that had high default rates in the
beginning and subsequently, for one reason or another, dropped out
of participation in the loan program and participated solely in the
Pell Grant program.
I reviewed a lot of records from the Department of Education
looking for such a school and I ran across lADE American Schools
and noticed that they had a dramatic increase in the amount of
Pell Grants that they drew down since 1992 when they ceased par-
ticipating in the loan program. At the time we chose it, we did not
have any allegations that lADE had any problems. We just had in-
dications that they had rapid growth and started looking at them
based on that criteria.
In the 2 years prior to lADE ceasing participation in the loan
program, they drew down slightly under $4 million in Pell Grants.
In the 2 years following its cessation of loan activity, lADE drew
down a total of approximately $30 million in Pell Grants, i Just to
give you some idea of the size of the Pell revenue at lADE Amer-
ican Schools compared to some schools familiar to you, Mr. Chair-
man— Emory University, Georgia State University, and the Univer-
sity of Georgia — as you can see, lADE drew down much, much
more in Pell Grant revenue than any one of those three much larg-
er universities. 2
The staff began its investigation of lADE in April of 1994. In the
late summer of 1994, the Civil Fraud Division of the Department
of Justice began an investigation of lADE. Subsequently, an lADE
' See Appendix A to staff statement, page 96.
^ See Appendix B and C to staff statement, pages
97-98.
8
employee wrote an anonymous letter to lADE's accrediting agency
in early 1995 alleging Pell Grant program abuses at lADE.
As a result of t'lis letter, the accrediting agency undertook an un-
announced site visit to lADE, which led to the agency's instituting
action in March 1995 to withdraw their accreditation of lADE.
Faced with the possible loss of its accreditation, an ongoing Justice
Department investigation, and the Subcommittee's own investiga-
tion, lADE closed its doors on March 13, 1995.
lADE apparently expended much time and effort on maximizing
the amount of Pell Grants it could obtain. It seemed to spend little
time or effort on providing its students with a quality education.
Indeed, the only time LADE seemed concerned with its students'
education was when it had to demonstrate the nature of that edu-
cation to State, Federal, or accrediting agency reviewers.
The staff interviewed numerous students and instructors con-
cerning this issue. A common thread running through all of these
interviews was the poor quality of education offered by lADE.
While the staff found many dedicated instructors working at lADE,
their efforts were consistently undermined by LADE's owners and
senior management.
The staff was told that automotive technician classes at lADE
often consisted of more than two dozen students crowding around
the engine of one single car, making it nearly impossible for each
student to see the part of the engine being worked on. One instruc-
tor told the staff that his students had tried to talk him into bring-
ing his car so the students could work on it in class. He stated that
he refused because he was not confident enough of his students'
abilities to let them work on his own car. An lADE student with
whom the staff talked was not so smart. He was convinced to bring
his own car for his fellow students to work on in class. He told the
staff that in the course of learning how to fix cars, they so ruined
his car that it never ran again properly.
However, when the time came for LADE's reaccreditation site
visit, the school suddenly obtained a new engine for its students.
Unfortunately, none of the students was allowed to train on the en-
gine. Indeed, they were told that they were not even allowed to
touch it. When the accrediting team left the campus, so did the en-
gine.
Senator NUNN. Does the accrediting team interview students
when they go to the campus like that?
Mr. Webster. Yes, they do. Apparently, they didn't interview the
same students we did. We had information that when the accredit-
ing team was there, lADE officials chose the students that the ac-
crediting team would interview. In other words, they filled the
classes that the accrediting team would visit with students who
were coached in what to tell or what to answer with respect to
their questions.
Senator NUNN. Did you have any trouble getting information
from students when you visited the campus?
Mr. Webster. No, sir, we didn't. In fact, after we arrived in Cali-
fornia, we were there a few days; it was like the flood gates opened.
We received phone calls from many, many students very eager to
talk to us.
lADE's efforts to spruce up for reaccreditation visits were evi-
dently quite blatant. A Department of Education IG investigator
told the staff of accompanying officials of the State licensing agency
on an unannounced site visit to lADE. The investigator stated that
at the time they arrived, they found lADE in the midst of prepar-
ing for a reaccreditation site visit.
According to the investigator, as they walked around the school's
campuses, they noticed that additional equipment was coming out
of the woodwork. Strangely enough, though, the investigator appar-
ently took no action to inform the accrediting agency of her obser-
vations, nor did she refer the matter for further follow-up by the
IG itself. The reasoning the investigator gave the staff for this was
that she had only been at lADE to act as an interpreter for the
State officials and had not been there in an investigative capacity.
Senator NUNN. Is she still working for the Department of Edu-
cation?
Mr. Webster. To the best of my knowledge, she is.
Senator NuNN. And what is her job?
Mr. Webster. She is an investigator, a criminal investigator.
In addition to failing to provide its students with a quality edu-
cation, lADE also failed to provide them with adequate placement
services. In contrast to its enticing advertising claims of over 70
percent placement and its promises to students of jobs with begin-
ning wages ranging from $7 to $15 per hour, lADE did little to as-
sist its students in finding employment in the fields for which they
had been trained. To hide this fact from the accreditors and the
regulators, lADE engaged in a pattern of deception and falsifica-
tion designed to make it appear that minimum placement require-
ments were being met.
Students in lADE's truck driving and computer systems pro-
grams also complained about failed promises with regard to place-
ment. A review of a random sample of the placement records of stu-
dents in these programs shows the following results, which are on
the tripod now.i As you can see, one graduate, Edin, of the com-
puter operations course, is now a pit boss at a casino. Jose also
graduated from computer operations; now, he packs bags. Jesus,
another computer operations graduate, now works as a bartender.
lADE's poor placement services almost led to the school losing its
accreditation in July 1992. During a reaccreditation site visit that
year, the accrediting agency not only found lADE's placement serv-
ices to be deficient, but stated that the results of its placement ef-
forts are detrimental to its perceived integrity and stature in the
community.
Partly as a result of LADE's problems with placement services,
the accrediting agency deferred granting lADE reaccreditation
until April 1993, pending receipt of additional information and a
follow-up visit to all branch campuses. When those follow-up visits
took place in March 1993, the accrediting agency reviewers found
what they termed a dramatic turnaround. What the reviewers did
not know, however, was this dramatic turnaround was the result
of an elaborate pattern of deception directed by the highest levels
of lADE's management.
' See Appendix D to staff statement, page 99.
10
A former lADE placement counselor informed the staff of what
she called a virtual dirty tricks crew which was used by lADE to
falsify ahd inflate placement statistics. According to her, 8 to 10
lADE employees were sent to the local courthouse to obtain names
of companies which had filed for bankruptcy. These companies
were then cited in lADE's records as locations where students had
been placed, with the full knowledge that there was little chance
that any verification could be done.
Arnoldo Sanchez, another former lADE employee, told the staff
of other methods utilized by Bernardo and Sergio Stofenmacher to
falsify placement data and deceive the accrediting team in connec-
tion with their follow-up visit. According to Mr. Sanchez, he was
directed by Sergio Stofenmacher to disconnect one of lAJDE's fax
machines and to answer that number as if it were a place of busi-
ness.
Another lADE employee then gave the accrediting team review-
ers the number, telling them that it was a number of a business
which employed lADE students. When the reviewers called the
number, Mr. Sanchez answered and confirmed that the particular
student in question worked there. Mr. Sanchez told the stafi" that
during the follow-up visit, everything was a show designed to cover
up lADE's problems and to fool reviewers into believing that LADE
had come into compliance with the accrediting agency's require-
ments.
Senator Nunn. Could you stop right there, Mr. Webster, and
just — you have been in investigations a long time yourself now. You
are an investigator, you are out there in the field, you have got
somebody who owns a school who is obviously trying to deceive,
and doing a pretty good job of it. What should the investigators
have done in those circumstances? You are looking at it now from
this perspective. What should they have done that they didn't do
when they were out there basically being led down a fraudulent
trail?
Mr. Webster. As far as the accrediting team reviewers, I have
no knowledge of their level of investigative expertise. Had I been
on the team, though — actually, if they are intent on defrauding a
reviewer, unless some flags go up somewhere along the way, it is
pretty hard to catch it. The reviewers looked at it on face value,
saw no indicators of fraud occurring, and didn't check into it any
further.
Mr. Edelman. I might just add, though. Senator, that at the
time that this deception happened, it was on a return visit by this
accrediting team. They had been at the school only a few months
previously and had found tremendous problems in the placement
area, so much so that they gave the school the lowest possible rat-
ing that it could in that particular area. And when they came back
in a matter of only a few months' time, suddenly there was this —
as they themselves used the term, a dramatic turnaround. At least
in my opinion, one should have questioned how a school like that
could have achieved such a dramatic turnaround in so short a time
period.
Senator Nunn. OK, you question it. You are skeptical. What do
you do then?
11
Mr. Edelman. Well, try to talk to students, try to talk to stu-
dents of your choosing rather than students of the school's choos-
ing.
Senator NUNN. Letting them choose the people you talk to is a
fundamental investigative error, right?
Mr. Edelman. I would think so, because you are always at risk
that the students that are given to you have been coached in some
manner.
Senator NUNN. How about talking to former students?
Mr. Edelman. Certainly, I think that probably also should have
been a step that should have been taken.
Senator NuNN. Any evidence that that was done?
Mr. Edelman. Not that we are aware of, no.
Mr. Webster. No.
Mr. Edelman. We are also not aware of the extent to which they
actually tried to contact employers to verify placement statistics.
Basically, they just seemed to take what they were given by the
school at face value without taking into account this dramatic turn-
around in such a short period of time and believing what they were
told by the school.
Mr. Webster. We also found it helpful when we talked to both
current and former employees. They had a lot to tell us, too.
The staffs investigation has also revealed that lADE engaged in
a widespread pattern of altering student financial aid files, includ-
ing the forgery of student signatures on official forms and docu-
ments and the falsification of information on course attendance and
grade sheets. These actions were consciously undertaken for the
purpose of obtaining Pell Grants for students who had never en-
rolled at lADE and of avoiding making required refunds for stu-
dents who had enrolled but had subsequently dropped out. As a re-
sult of these actions, lADE improperly obtained and retained mil-
lions of dollars in Federal student aid assistance funds. ^
The staff discovered that numerous students who had merely in-
quired about lADE's programs without ever enrolling unwittingly
became students in lADE's records for whom the institution re-
ceived multiple Pell Grants. Such is the case of Maria Arana. On
February 1, Ms. Arana went with a friend to the Santa Ana cam-
pus of lADE to inquire about taking computer courses. After Ms.
Arana had talked to a couple of lADE employees, she decided not
to enroll in lADE. She told the staff that she felt that Anna, one
of the employees she talked to, had been too pushy and that she
seemed more interested in getting her to sign forms than in ex-
plaining to her what lADE had to offer.
Despite Ms. Arana's decision not to enroll at lADE, it appears
that lADE nevertheless enrolled Ms. Arana. The chart ^ here shows
a no-show list with Ms. Arana's name on it, meaning that lADE
American Schools expected Ms. Arana to show up for class because
she had actually enrolled. The staff examined lADE's student
records and found Ms. Arana's name on a list of no-show students,
as we just saw there.
^ See Appendix E to staff statement, page 100.
2 See Appendix F to staff statement, page 101.
12
An examination of lADE's master sheets, however, uncovered ad-
ditional information relating to Ms. Arana which was quite disturb-
ing. Master sheets, of which we see one page of a master sheet
here, show, among other things, the particular classes that the stu-
dent has taken, whether the student has maintained satisfactory
progress, and the date and the amount of any financial aid re-
ceived.
The staff discovered that included among lADE's master sheets
was this one for Ms. Arana. ^ The master sheet recorded Ms. Arana
as having started a program in English as a second language. In
light of Ms. Arana's statement to the staff that she never attended
lADE, the only way in which lADE could have maintained the in-
formation which it had for Ms. Arana, and therefore the only way
in which it could have obtained a Pell Grant for Ms. Arana, would
have been through the creation of phony attendance and academic
records.
Can we go back to the previous chart, please?
If you look in the lower part right in the middle of the master
sheet — I realize this is difficult to see, but there is a square there
that highlights two payments of a Pell Grant of $1,150. So what
this is telling us is that lADE actually drew down $2,300 worth of
Pell Grant funds in the name of Ms. Arana, a student who never
attended lADE American School classes.
The staff found numerous master sheets showing academic
progress and Pell Grant disbursements for other students. We have
examples of 13 students, in addition to Ms. Arana, who were listed
by lADE as no-shows. The staff found no record of lADE ever hav-
ing made any refunds for any of these students, to include Ms.
Arana, and again we see here the $1,150 actually paid for Ms.
Arana.
Senator NUNN. Are those checks made out, the Pell Grant
checks, to the student and the school, or are they made out directly
to the school? Did she have to sign any of those checks?
Mr. Webster. In lADE's case, the students normally sign the
check directly over to the schools.
Senator NuNN. So she had to sign the checks before they cashed
them?
Mr. Edelman. Well, the Pell Grant system works on a draw-
down basis where the school — it is really sort of an electronic funds
transfer where the school is able electronically to draw down funds
from the Government's accounts.
Senator NuNN. Without the student ever having signed any-
thing?
Mr. Edelman. The money is then supposed to be applied to the
student's account to cover whatever tuition or other expenses the
student has with the school. If there is then any money left over,
that money is to be given to the student.
Senator NuNN. But the student never has to touch the check?
Mr. Webster. The student doesn't actually touch the check, but
the student does have to sign something. There is something called
an Electronic Student Aid Report that the student has to sign in
>See Appendix G to staff statement, page 102.
13
order for lADE or the institution to actually cash the check or draw
down the money in the name of that student.
Senator NuNN. Well, did you ask this particular individual
whether she had signed anything.
Mr. Webster. She never received anything, never signed any-
thing that resembled an Electronic Student Aid Report.
Senator NuNN. Do you have a copy of the report that was filed
for her?
Mr. Webster. We have no record of that report.
Senator NuNN. So before the Department of Education could put
money in the Pell Grant account for this particular individual, she
had to sign something, and that form had to be sent to whom?
Mr. Webster. It is maintained in a student record at the institu-
tion.
Senator NuNN. It doesn't go to the Department of Education?
They don't see a copy of it?
Mr. Webster. No, they don't.
Senator NuNN. So they are really taking the word of the school,
is that right?
Mr. Webster. They are taking the word of the school that the
form is actually signed by the student.
Senator NuNN. So the student doesn't enter into the picture at
all in this equation?
Mr. Webster. In this case, no, it didn't.
Mr. Edelman. The forms are handled by a processor on the part
of the Government who reviews the forms, and then the forms are
sent back and the student is supposed to verify the information
that is on the form and then sign it and return it to the school,
and then the school is to maintain the signed copy.
Senator NuNN. Do student loans work the same way? The stu-
dent actually has to sign, I am sure, to get a loan, right?
Mr. Edelman. Given the recent changes, that may be a question
best put to the witnesses to come from the Department of Edu-
cation. We haven't looked that closely at the processes of the loan
program in the last couple of years to give you a proper answer to
that, I think.
Senator NuNN. Well, by law, you can't make a loan unless you
sign a paper.
Mr. Edelman. Oh, certainly. You would have to have the student
verify the financial information and all on that and there would be
a promissory note as well.
Senator NuNN. Well, I will ask our Education witnesses later
about exactly how that transfer of money on Pell Grants works,
whether the student herself has to participate in that, whether the
student actually ever sees the money or actually has to sign some-
thing that goes to the Department, in lieu of just staying with the
school.
Mr. Edelman. One of the key things to keep in mind here, also,
is that the way the Pell Grant program works is that the schools
are allowed to draw down this Pell money in advance — I believe,
it is 21 days in advance of the student actually starting classes. If
a student is a no-show or never attends, then the school is obvi-
ously under a requirement to reimburse that money, refund it to
the Department.
14
That is where you get into the whole issue, which happened with
lADE in a number of instances, where the school, because of defi-
ciencies, was put on what is known as the pajonent by reimburse-
ment system. This means that rather than being allowed the privi-
lege of drawing down money in advance of a student's enrollment,
the school is required to prove to the Department for each student
that the student actually did enroll and began classes before the
school can collect the money for that student.
Senator NUNN. OK.
Mr. Webster. Senator, giving lADE the benefit of the doubt,
thinking, well, maybe human error — all this happened, all these
forms were filled out. Indications were that they received $2,300 in
a Pell Grant for Ms. Arana. We wanted to check with the Depart-
ment of Education to make sure that $2,300 had been drawn down
in the name of this student, so we requested a student payment
summary, looking for Ms. Arana's name, and unfortunately her
name was there. So, in fact, $2,300 worth of Pell Grant funds was
drawn down in her name by lADE American Schools.
lADE's fabrication of records to create enrolled students was bla-
tant and intentional. Moreover, this fabrication went beyond the
creation of ghost students and included the falsification of records
pertaining to students who had, in fact, enrolled, but subsequently
withdrew or dropped out of school. If lADE received a Pell Grant
check on behalf of a student who had withdrawn before completing
at least half of his course, the information on the student's master
sheet would be changed by lADE employees to make it appear that
the student had completed half of the course in order to avoid pay-
ing a refund.
The former financial aid director at lADE's South Gate campus
told the staff that she was directed not to post no-shows or drops
at all because to do so would generate too great a refund liability
for which lADE did not have the money. Apparently, this delib-
erate failure to post drops and no-shows went on for quite some
time.
On July 14, 1994, Mr. Ken Williams, the former financial aid di-
rector of lADE American Schools, addressed a memorandum on
this issue to the Stofenmachers and lADE's corporate counsel,
Gonzolo Frixes. Interestingly, this memorandum was marked "ur-
gent and confidential," and stated that it was not to be shared with
anyone other than those to whom it was addressed.^
In his memorandum, Mr. Williams stated, "There are approxi-
mately 1,607 students who are no-shows, withdrawals, termi-
nations, etc., who have not been posted to the RGM system as no
longer enrolled. As such, these students when posted will create
approximately $1,035,310 in additional refunds." Mr. Williams
went on to estimate that as of June 30, 1994, lADE's total liability
in refunds due, including both posted and non-posted refunds, was
nearly $2.5 milhon.
Mr. Williams' memorandum is amazing in its candor and pro-
vides perhaps the clearest picture of the types of abuses which
were occurring at lADE. For example, at the beginning of his
memorandum, Mr. Williams stated, "As you are aware, during this
'See Appendix H to staff statement, page 104
15
same period between 7/1/93 and 6/30/94 in order to increase cash
flow we eliminated a number of checks and balances which allowed
checks to print which would not normally have printed and/or de-
posited into lADE's general fund."
"Relaxing previously existing procedures allowed lADE to signifi-
cantly increase cash flow in the short run. However, in the long
run, the changes dramatically increase the amount of refunds due.
For example, many of the students for whom we printed and depos-
ited checks, should never have received any Pell Grants at all. Con-
sequently, as soon as the drop information is posted for these stu-
dents, we will be forced to pay back all of the money we received
for them. As I warned when lADE senior management first decided
to do this, the long term implications for refunds owed has been
dramatic."
"It should be noted that it may be possible to move," Mr. Wil-
liams continues, "some of these payments and postings back and
forth by as much as two to 4 weeks. However, the greater the delay
the greater the risk we run in terms of audits, excess cash, reim-
bursement and/or having our aid eligibility and/or license to oper-
ate terminated."
Perhaps most incredible is the concluding admonition contained
in Mr. Williams' memorandum in which he warned of the con-
sequences of not correcting the refund problem. There, he stated,
"lADE will be required to undergo what are now annually required
student aid audits and will, as we have already been admonished
by the Nunn Committee, be required to provide audited financial
statements. These audits coupled with the audited financial state-
ments will, given the auditor's familiarity with the RGM system,
reveal the unpaid refunds. Even if we retained an auditor unfamil-
iar with RGM, the refunds would either be discovered during the
file review or would be discovered when the auditor, as required by
Federal law, met with RGM."
And he continues, "Frankly, even once the refunds are paid, they
are already late. As such, the longer we wait to pay the refunds
the greater the risk to LADE. Our biggest dilemma is that though
we could once again relax check printing procedures to generate
more income in order to pay the 93-94 refunds, this would only
create more refunds next year and make the problem worse assum-
ing we could hide it for another year which, fi-ankly, we can't.
Frankly, in light of the Nunn investigation, if they discovered and
could prove that lADE had deliberately hidden refunds and pro-
vided false information to Congress, lADE's senior management
could face criminal prosecution. I say this not to scare you, but to
point out as I have before that we have to fix this problem before
it is discovered by some outside agency."
Mr. Williams also appeared at a video deposition conducted by
the Subcommittee staff and was advised of his right to have the
benefit of counsel. When we deposed Mr. Williams concerning this
memo, he admitted that only a small percentage of the refunds
owed by lADE had actually been paid and Pell Grant checks had
been deposited without verif3dng if the corresponding Electronic
Student Aid Reports had actually been signed.
If we may, we have a short videotape of a portion of this deposi-
tion where Mr. Williams describes the level of intent to defraud. I
16
have to mention at this juncture that on the tape Mr. WilHams be-
grudgingly admits to knowing that the owners were defrauding the
Government and involved in criminal activities. He admits to
choosing to remain ignorant of these activities and not reporting
them to any authority.
Mr. Williams was evasive and at times tended to ramble on in
his answers. As such, when editing this portion of the tape for this
hearing, it was sometimes necessary to cut off some questions or
answers. The full videotape is nearly 2 hours in length, and I
would ask to include it in the record.
Senator NUNN. Without objection.^
Senator NUNN. Now, what was his position at the time this was
made?
Mr. Webster. He was the financial aid director.
Senator NuNN. Was the school still in existence when this video-
tape deposition was made?
Mr. Webster. No, it was not.
Senator NuNN. It had already gone bankrupt?
Mr. Webster. It had already filed for bankruptcy.
Senator NuNN. Was he still employed then or was he a former
financial officer?
Mr. Webster. He is now the former financial aid officer.
Senator NuNN. What was he when you made the tape, former at
that stage?
Mr. Webster. Former when he made the tape, but he currently,
and when we made the tape, is employed by lADE's processor,
RGM.
Senator NuNN. Was he represented by counsel during this tape?
Mr. Webster. He chose not to be represented.
Senator NuNN. He was fully advised he could be represented?
Mr. Webster. Yes, he was.
Senator NuNN. Approximately how long is the tape that you are
going to show us?
Mr. Webster. A little less than 5 minutes.
Senator NuNN. It is edited, right?
Mr. Webster. Excuse me?
Senator NuNN. The tape is edited?
Mr. Webster. Yes, it is.
[Videotape shown.]
Mr. Webster. I also need to mention that Mr. Williams, prior to
being employed with lADE American Schools, was formerly with
the California State Guarantee Association.
As has been mentioned previously in this statement, lADE
American Schools took into approximately $58 million in Federal
Pell Grant money from 1990 to 1995. Based on what the staff dis-
covered during its investigation, it appears that very little of that
money was used by lADE to provide books, supplies, equipment,
placement services, or any of the other necessities of a quality voca-
tional education.
Much of the Federal money which LADE did receive was for stu-
dents who either withdrew or never attended, and for whom lADE
therefore incurred little or no expenses. In light of this, one would
' See Exhibit #5, page 157.
17
think that lADE should have had no cash flow concerns. A closer
examination, however, shows that lADE has been in serious finan-
cial difficulty for a number of years.
The staff also obtained a sense of lADE's financial difficulties
from interviews with various lADE employees. Many told the staff
that from time to time, their paychecks were not honored by the
bank for lack of funds. Luz Zamorena, lADE's former office man-
ager and director of personnel, told the staff that lADE's financial
problems seemed to start about the time Sergio Stofenmacher came
to the school in 1990. Beginning in 1990, accounts which previously
had always been paid on time increasingly became past due. Ms.
Zamorena also confirmed to the staff that on at least three occa-
sions, once in 1992 and twice in 1993, her paycheck and those of
at least 50 other employees were not honored.
Where did the money go? Well, according to Mr. Sanchez, lADE's
problems with insufficient funds often seemed to coincide with
those times when Abraham Stofenmacher returned to Argentina.
In addition to the statements of lADE's employees, the staffs re-
view of lADE's general ledgers and check registers also provided
some interesting information as to where some of lADE's money
was going.
The staff undertook a limited review of checks written by lADE
during the 6-month period of August 31, 1993, through January 31,
1994. During this time, LADE's revenue from Pell Grant draw-
downs was over $8 million. The staffs review uncovered these pay-
ments before you for the 6-month period. ^
The staff notes that Alley Parking, Basa Management COTC,
and T&P Advertising, which received a total of almost $600,000
during this time period, are all companies owned by the
Stofenmachers. The payments to Mercedes Benz and BMW Credit
Corporation represent payments on leases of vehicles which were
used personally by the Stofenmachers. As you can see on this chart
here, it is a lease agreement for a BMW.^ While we have no prob-
lem with a corporation providing corporate vehicles for employees,
as you can see in the highlighted portion of this lease agreement,
which apparently is signed by Bernardo Stofenmacher, he initialed
the block where it says the vehicle is going to be used for personal,
family, or household purposes.
Also of note during LADE's payments is the — if we can go back
to the previous chart, please — is the payment of $2,541.50 paid
from the school's account for child support payments. From what
the staff has been able to determine, these payments were made
to satisfy child support personally owed by Sergio Stofenmacher.
A number of checks were also written out in the names of the
individual Stofenmachers. Each of the Stofenmachers received a
substantial annual salary. Abraham received $146,000, Bernardo
and Alejandro received $200,000, and Sergio received $220,000. In
addition to their salaries, at least some of the Stofenmachers also
received interest-fi-ee loans from lADE. lADE's financial statement
for the period ending January 31, 1992, lists $144,395 in advances
to officers.
iSee Appendix I of staff statement, page 107.
2 See Appendix J to staff statement, page 108.
18
By the time of the following year's financial statement — that is,
for the period ending January 31, 1993 — that figure for officer ad-
vances had ballooned to $379,833. A review of lADE's general ledg-
er, however, reflects no repayments by any company officer, nor
was there any evidence found of such repayment. The mysterious
rise and fall and rise again of the figure for officer advances is per-
haps symptomatic of larger problems with respect to lADE's finan-
cial accounting.
The members of the accrediting team found that lADE was ex-
tremely behind in its accounting. One of the team members subse-
quently told the staff that lADE's accounting practices were so poor
that he didn't think that the school would even have known if it
had bad debts. Indeed, the team member was of the opinion that
lADE did not have a clue as to what their financial status was and
that, as a result, it was just making up its financial statements.
If this is true, it certainly has serious implications not only for
lADE's ability to provide an accurate picture of its financial condi-
tion, but also for its ability to account for the millions upon mil-
lions of Federal taxpayer dollars which the school received over the
years. This chart ^ showing their total revenue versus the Title IV
funds that they received reflects what the team member's opinion
was that they did not have a clue as to what their financial status
was.
If I may point out the year 1992 and 1994, when Title IV reve-
nue exceeded what lADE American Schools listed as their total
revenue in their financial statements.
Senator NuNN. How could that be? How could you get more from
one source than the total?
Mr. Webster. The only explanation I have. Senator, going on
what the team member said, is they just did not have a clue and
they were simply making up their financial picture.
Senator NUNN. Did Mr. Sanchez tell you how the money was
taken out of the school, how Abraham took the money away? Did
he put it in a cashier's check? What did he do?
Mr. Webster. Mr. Sanchez told us that he thought, or it was
general opinion of other employees and Mr. Sanchez, that Mr.
Stofenmacher took the money out of the country in a suitcase to
Argentina, and he thought about $10,000 at a time.
Senator NuNN. Was that in cash?
Mr. Webster. In cash.
Senator NuNN. After cashing the Pell Grant checks? How did the
money get converted to cash?
Mr. Webster. Either through one of their other companies that
they owned, or taking it directly from lADE's accounts. From re-
viewing the check register we have a list of 800 checks written di-
rectly to lADE, much as one would write a personal check for cash.
For, I think, about a 6-month time period, we found those 800
checks totaled $4.5 million, for which there is no explanation where
the money went or what it was used for.
Senator NuNN. He said he was taking it out $10,000 at a time
in a suitcase?
Mr. Webster. That is what Mr. Sanchez said.
* See Appendix K to staff statement, page 109.
19
Senator NUNN. That would take a lot of trips to get $4 million
out.
Mr. Webster. From what we understand, he does take a lot of
trips to Argentina. He still has family down there.
Senator NuNN. Do you have any travel record?
Mr. Webster. The only indication that we have that actual trips
were made was right after the school closed, we found that one of
the sons — in fact, the day lADE filed for bankruptcy, March 13 of
this year, one of the sons purchased a one-way ticket to Argentina
and has not been seen in Los Angeles since.
Senator NuNN. How many of the family remain in this country
now?
Mr. Webster. Just one.
Senator Nunn. Who is left?
Mr. Webster. Bernardo Stofenmacher is the only one left.
Mr. Edelman. At this point, Mr. Chairman, we would like to
turn to an examination of the role played by the various oversight
agencies which had responsibility for this school and for manage-
ment of the Pell Grant program.
Participation of institutions in Federal student financial assist-
ance programs is subject to a regulatory triad consisting of State
licensing authorities, independent accrediting agencies, and the
Federal Department of Education. Each of these entities is respon-
sible not only for making determinations affecting entry into the
programs, a process which is known as gatekeeping, but also for
conducting continuing oversight to ensure that a participating in-
stitution remains in compliance with applicable program require-
ments.
Over the years, this Subcommittee has been quite critical of the
ability of this regulatory triad to prevent fraudulent institutions
from gaining access to the program in the first instance or to sub-
sequently detect and pursue fraud by such institutions once access
has been gained. Unfortunately, the case of lADE represents one
more example of a failure of this system.
From the time it first entered the Federal student financial as-
sistance programs in 1989 until the time it closed its doors and
filed for bankruptcy in 1995, lADE underwent close to a dozen au-
dits, examinations, and reviews by the California Council for Pri-
vate Postsecondary and Vocational Education, its State licensing
authority; the Accrediting Council for Continuing Education and
Training, its independent accrediting agency; and the Department
of Education itself.
Each of these audits, examinations, or reviews found problems of
varying degrees in one aspect or another of lADE's operations. At
various times, lADE was found to owe the Federal Government
money for student financial assistance funds it should not have
used. Twice, lADE was placed on reimbursement for brief periods
of time, and once there was even some consideration given to ter-
minating LADE from the program altogether. None of the members
of the triad, though, ever seemed capable of understanding the full
extent of the abuse going on at lADE.
As a result, lADE managed to retain its access to Federal fund-
ing with little or no serious impairment of its activities until earlier
this year, when an unannounced site visit by its accrediting agen-
20
cy, based on an anonymous tip, led to the termination of lADE's
accreditation. By that time, however, lADE has taken in almost
$58 million in Federal student financial assistance funds.
While participating in Federal student financial assistance pro-
grams, lADE was subject to continual institutional monitoring by
its State licensing authority, its independent accrediting agency,
and the Department of Education. Any one of these arms of the
triad could have taken action against lADE which would have led
to the school's no longer being eligible to obtain Federal dollars.
Unfortunately, none of them seemed capable of taking swift, sure,
and effective action to stop the ongoing abuses at lADE.
In order to participate in Title IV programs, an institution must
be licensed or otherwise legally authorized to provide a course of
postsecondary education by the appropriate agency in the State in
which it is located. lADE was licensed by the California Council for
Private Postsecondary and Vocational Education. lADE's licensing
authority conducted its first substantive audit of the school's oper-
ations in May 1993. This audit was initiated to determine lADE's
compliance with applicable laws and regulations pertinent to the
administration of the school's English as a Second Language pro-
gram.
The licensing authority found a number of areas of non-compli-
ance in the course of its audit and directed lADE to undertake cer-
tain actions to bring the school into compliance. Despite lADE's re-
fusal to comply with the licensing authority's directives, and de-
spite the fact that failure to comply with auditing findings could
form the basis for denial of a license, the licensing authority never-
theless granted conditional approval to lADE's ESL program until
June 1994.
The primary condition attached to lADE's approval was that the
licensing authority would then conduct a follow-up audit prior to
the expiration of the approval. This audit was conducted in May
1994 and an audit report was subsequently issued in August of
1994. The 1994 audit contained a number of significant findings,
including the following: a failure to provide financial documents to
the audit team, or to provide them in a timely fashion; a failure
to satisfy financial responsibility requirements; a failure to pay re-
funds in a timely manner; a failure to provide requested informa-
tion pertaining to refunds; the disbursement of Pell Grants prior to
the processing date of students' Electronic Student Aid Reports;
and the disbursement of Pell Grant funds without confirmation of
citizenship status. These are all indicators of serious institutional
problems.
In October of 1994 lADE requested and was granted a 60-day ex-
tension to respond to the findings of this audit. The licensing au-
thority found lADE's response to be inadequate and informed the
school that it intended to pursue administrative action against the
school. By this time, however, it was already January of 1995, over
IV2 years since the licensing authority's first audit of lADE had
discovered some of these problems. During that IV2 year period,
lADE drew down over $10 million in Pell Grant funds. ^
'See Appendix L to staff statement, page 110.
21
If we could just go back to the previous chart for a moment, this
chart shows — the blue line represents a running total of the
amount of Federal funds that lADE was drawing down for the pe-
riod 1990 through 1995, and each of the notations along the line
of that chart show the various actions that were taken by the State
licensing authority during that time period. So you can see that
while the licensing authority was in there conducting its audits,
making its findings, granting extensions to the school to respond
to those findings, et cetera, the school was just racking up more
and more money and the meter was continually ticking.
Even the licensing authority's decision to pursue administrative
action, though, did not bring swift results. Apparently, although it
has independent authority to license schools, it does not have inde-
pendent authority to revoke licenses already granted. In order to
do so, the licensing authority is required to refer the matter to the
California attorney general's office. The attorney general's office
then makes a determination whether to pursue an administrative
action seeking revocation.
On January 9, 1995, the State licensing authority sent a memo-
randum to the attorney general's office referring the lADE audit is-
sues for such administrative action. By the time lADE closed its
doors in March of 1995, 2 months later, the attorney general's of-
fice had not yet taken any action on that referral.
In addition to being licensed by the State in which it is located,
an institution must also be accredited by an independent accredit-
ing agency approved by the Secretary of Education. lADE was ac-
credited by the Accrediting Council for Continuing Education and
Training, a body known as ACCET. That accreditation was granted
on July 1, 1989.
Once again, as I go through this chronology, the chart ^ that is
up here — the green line now is that same running total of Federal
funds that was going to lADE and the various notations show the
actions that were being taken by the accrediting agency at these
various times.
In July 1992, ACCET conducted a review of lADE's operation in
connection with its consideration of lADE's reaccreditation. That
review found a number of areas of weaknesses, including the fol-
lowing: 1) lADE's business plan was considered elementary and not
well thought out; 2) Numerous grade and attendance records had
been whited out or changed; 3) There was an indication of incon-
sistent charges being levied for tuition and fees; and 4) Student
records were found to be inadequate and placement services were
found to be inadequate.
As a result, ACCET decided to defer a decision on lADE's
reaccreditation pending the receipt of additional information from
the school and follow-up visits to all campuses. In the meantime,
ACCET received correspondence from the State licensing authority
in August of 1992 informing it of a State investigation of certain
complaints filed against lADE. On the basis of these complaints,
ACCET scheduled an unannounced site visit to lADE. This visit
took place in October 1992.
' See Appendix M to staff statement, page 111.
22
Among the findings from this visit were the following, which is
a quote from the site visit report. "The tuition appears to be set at
a level that given the length of the programs; [sic] it can be covered
exclusively with Pell grants. Students interviewed commented sev-
eral times that they are going to school free. Several students ex-
pressed frustration and confusion over how they are paying for
school. They stated that they were told to "sign here, put this
amount here, etc." and then the first week of classes they were told
what they would be awarded. They do not understand that they are
using two or three Pell grants, both partial and full, to pay for
their education."
In light of the findings of this visit and several unresolved find-
ings from the previous visit, ACCET determined to continue the de-
ferral of lADE's accreditation. At the same time, however, ACCET
directed lADE to show cause as to why its accreditation should not
be withdrawn. Had lADE's accreditation been withdrawn, it would
no longer have met the requirements to be an eligible institution
for purposes of participation in Title IV programs.
Once again, however, lADE managed to dodge a potentially fatal
bullet. lADE's response to the show cause directive apparently was
convincing enough to lead ACCET to believe that the school was
instituting the changes necessary to bring it into compliance with
ACCET standards. In addition, an ACCET follow-up visit in March
1993 found much improvement in a number of previous problem
areas. Describing these improvements, the follow-up report used
such terms as "dramatic turnaround," "significant effort," and "no-
ticeable changes."
On the basis of lADE's response and the follow-up report,
ACCET determined in April 1993 to vacate the show cause direc-
tive and to grant lADE reaccreditation. Of course, what ACCET did
not know in vacating its show cause directive was that much of
what its site visit team had observed at lADE was a sham de-
signed specifically for the purpose of deceiving ACCET into believ-
ing that lADE was in compliance with the accrediting agency's
standards. We have previously cited many of the ways in which
lADE carried out this sham.
In January of this year, ACCET received an anonymous letter al-
leging, "discrepancies in the operating procedures" of LADE. The
letter hinted at issues of no-show students, inadequate documenta-
tion of prior skills, financial instability, and failure to pay refunds
on time. ACCET officials viewed this letter as an urgent complaint
and scheduled an unannounced site visit to lADE. This visit took
place in February of this year.
The visit uncovered a number of serious problems, including the
following which were detailed in the evaluation team's report: 1)
Management did not demonstrate that its internal and external
governance was effective; 2) Management did not demonstrate that
the role of management was clearly defined, effective, or efficient;
3) The institution did not demonstrate a record of responsible fi-
nancial management with income sufficient to maintain its edu-
cational programs; 4) The institution did not demonstrate that fi-
nancial aid programs are capably administered, accurately recorded
and documented, and appropriately implemented; and 5) The insti-
tution did not demonstrate that tuition refunded and received was
23 ^
clearly documented and that cancellation and refund policies com-
plied with Federal and State regulations.
On the basis of these findings, the accrediting agency issued
lADE another show cause directive on March 2 of this year to show
cause as to why its accreditation should not be withdrawn. By this
point, lADE had just about run out of time. Within a week of the
accrediting agency's show cause directive, lADE had shut its doors.
A few days later, it had filed for bankruptcy.
In response to these actions, ACCET, in a letter dated March 16,
1995, withdrew lADE's accreditation. The withdrawal of the ac-
creditation, however, came 2 years and 2 months after ACCET had
issued its first show cause directive to lADE, and in that interven-
ing time period lADE had managed to obtain over $34 million in
Pell Grant funds.
Perhaps most disturbing of the various missed opportunities in
this case is the fact that the Department of Education, despite hav-
ing three separate teams examining lADE in 1992, either failed to
comprehend or ignored indicators of the ongoing abuses at the
school. Had the Department taken aggressive action in response to
these indicators, it might have saved tens of millions of dollars in
taxpayer money. ^ Instead, a review of the Department's actions re-
veals a tentativeness which ultimately led to the Department's let-
ting lADE continue its activities with virtual impunity.
The Department's first review of lADE commenced in March of
1992. This review consisted of an audit conducted by a team from
the Inspector General's Office of Audit and lasted from March 2,
1992, until November 9, 1992. The objectives of this audit were to
determine, 1) "whether [lADE] American Schools' programs were
eligible for SFA funds; 2), whether it had operated the SFA pro-
grams in accordance with Federal laws and regulations." According
to the Assistant Inspector General for Audit, LADE had been se-
lected for this audit because of its recent large increases in Pell
Grant draw-downs.
Early on in the audit, the audit team began to receive allegations
of potential fraud and abuse related to lADE's participation in Title
IV programs. Joe Tong, one of the primary auditors conducting this
audit for the Inspector General, interviewed Jorge Meza, the
former director of LADE's Los Angeles campus. Mr. Meza stated in
his interview that he had participated in falsifying student grades
at the direction of Sergio Stofenmacher so that lADE could show
the satisfactory progress of its students necessary to ensure the
continued flow of Title IV funds.
In addition, Mr. Meza stated that lADE had altered ability-to-
benefit test responses to make students eligible for financial assist-
ance and had falsified its student placement statistics to meet Fed-
eral requirements. Finally, Mr. Meza informed Mr. Tong that lADE
had been, "fixing" student records since being notified of the im-
pending Inspector General audit back in February. In addition to
his interviews, Mr. Tong's review of lADE files and documentation
uncovered what appeared to him to be indicators of possible fraud
and abuse.
'See Appendix N to staff statement, page 11''
24
Mr. Tong documented all of these problems in his audit work pa-
pers and sent a report of his findings to his supervisor, Mr. James
Okura. Mr. Okura apparently decided that these were not issues
of concern for the purposes of the audit, despite the fact that one
of the stated objectives of the audit was to determine whether
lADE was operating student financial assistance programs in ac-
cordance with Federal laws and regulations.
Despite his supervisor's failure to see the significance of his dis-
coveries, Mr. Tong contacted the Office of the Regional Inspector
General for Investigations. Meanwhile, the audit was focusing in
on just two issues — lADE's grading of ability-to-benefit tests to
qualify students and lADE's maintenance of Pell Grant cash bal-
ances in excess of Federal regulations.
The Inspector General investigation which was launched in re-
sponse to Mr. Tong's findings consisted of nine interviews with
former employees and students of lADE conducted from March
through August 1992. During those interviews, the investigators
were told of low grades that were whited out and replaced with
passing grades, of answers that were given to students taking abil-
ity-to-benefit tests, of documents that were created indicating stu-
dents passing tests for courses they had never even taken, of tests
that were falsified, of course assignments that were manipulated in
order to maximize Pell Grant awards, of textbooks in English that
were given to students for courses taught in Spanish, of placement
statistics that were falsified. One former instructor even told the
investigators that he had heard that lADE's owners intended to
make as much money as they could in 1 or 2 years and then sell
the school.
According to an internal Department document, on September
23, 1992, the Office of Inspector General indicated to the Depart-
ment's Region IX office that it intended to ask the Department's
Compliance and Enforcement Division to initiate termination ac-
tion against lADE. This would have removed lADE from any access
to Federal student aid funds.
In response to the stated intention of the Inspector General, the
Region IX office asked the Compliance and Enforcement Division to
place lADE on reimbursement. As you will recall, this is a system
by which the school must document in advance that students have
actually enrolled before the school could draw down Pell Grant
funds for those students.
Senator NuNN. Instead of drawing the money first, they have to
give the proof first and draw it later?
Mr. Edelman. Right.
The regional office subsequently decided to conduct a program re-
view to support the decision to place lADE on reimbursement. That
program review, however, lasted a total of 5 days. During those 5
days, the reviewers examined just 22 files for the award years 1990
to 1991 and 1991 to 1992. The reviewers did not focus on the alle-
gations which had been received by the Inspector General inves-
tigators. Rather, they appeared to concentrate on the same issues
the Inspector General's auditors had concentrated on; namely, the
improper determinations under ability-to-benefit testing and the
maintenance of excess cash balances.
25
The review concluded with what were considered to be minor
findings. Even though the reviewers did not consider their findings
particularly serious, lADE was still kept on reimbursement be-
cause of the Inspector General's supposed intention to pursue ter-
mination or other serious action against the school. On December
8, 1992, however, the Inspector General decided not to press for
termination, and as a result the Compliance and Enforcement Divi-
sion of the Department removed lADE fi-om the reimbursement
system, thereby allowing the school to draw down money in ad-
vance once again.
Despite the fact that the last substantive interview conducted by
Inspector General investigators was completed in August of 1992,
the Inspector General did not issue a report on its investigation
until July 1993, almost a full year later. The entire investigative
report consists of one-and-a-half pages. The report, written by Spe-
cial Agent Robert Gonzalez, states, "An investigation was initiated
in April 1992 based upon an interview of Jorge Meja [sic], former
LADE school director. Meja [sic] stated that lADE, 1) violated its
academic progress policy by not reflecting failing grades; 2) helps
students pass ATB tests; and 3) is not accurately reporting its job
placement rates.
"IS interviewed Jorge Meja [sic], two other former lADE instruc-
tors, Ignacio Rosas, Sergio Castro, and former employee Edgardo
Rivas. In addition, various students were also interviewed. The
interviews revealed a pattern of abusive tactics in recruiting and
ATB testing designed to obtain maximum enrollments."
"Also, the interviewees confirmed that lADE management
pushed staff to enroll as many students as possible and to report
student progress electronically so LADE could earn student finan-
cial assistance payments as quickly as possible.
"However, no person interviewed, including the original com-
plainant, made a credible allegation of criminal wrongdoing. Fur-
ther, a credibility gap in the objectivity of the former school em-
ployees was evident to the interviewers due to the circumstances
of their separation from lADE."
The staff finds it strange that Mr. Gonzalez left out of his report
the allegations made by Mr. Castro and each of the other instruc-
tors interviewed concerning the falsification of grades, tests, and
student records. Perhaps most disturbing, though, is Mr. Gonzalez'
statement that, "no person interviewed, including the original com-
plainant, made a credible allegation of criminal wrongdoing."
It is not clear to the staff why allegations of falsification of stu-
dent records designed to allow a school to collect Federal financial
assistance for an otherwise ineligible student does not rise to the
level of criminal wrongdoing. Nor is it clear to the staff why the
Inspector General investigators did not pursue the leads offered to
them in their initial interviews to determine whether these allega-
tions were, in fact, credible.
Mr. Meza, Mr. Castro, and Mr. Rivas all provided the investiga-
tors with names of other lADE employees who either knew of or
were involved in potentially fraudulent activities. There is no
record that the investigators ever interviewed these people, nor did
the investigators ever interview Ken Williams, lADE corporate di-
rector of financial aid, or any of the Stofenmachers.
26
Senator NuNN. Mr. Edelman, you have been in law and inves-
tigation for a long time. How do you explain this? Does this mean
that the people at the Department, the IG office — these are IG
Mr. Edelman. These are IG criminal investigators.
Senator Nunn. Does this mean they are inadequately trained?
Does it mean they are overworked? Does it mean there are too
many schools to regulate and they have to move from one to the
other? I mean, what do you deduce from this?
Mr. Edelman. We have been told by the Inspector General in
discussing this with him that their office did, in fact, have a very
heavy caseload and that their agents all handle numerous cases at
the same time, and I think they may admit that perhaps they did
not take some of the steps that should have been taken in this
case. However, regardless of the number of cases that one handles,
I think that to state that the kinds of allegations that they received
in interviews did not rise to the level of criminal conduct is out-
rageous. I think clearly there should have been follow-up to that.
Senator NuNN. That is just unexplainable based on the allega-
tions they had?
Mr. Edelman. We certainly have no explanation for it. One
would think that IG investigators have a little more training in
criminal investigation and procedures than perhaps the program
review people, and so why they did not follow up on some of these
things and why they did not think that the allegations they re-
ceived were either credible or important enough is beyond the
staffs capability to understand.
Senator Nunn. They were getting these allegations from employ-
ees and former employees?
Mr. Edelman. From both current and former employees of the
school.
Senator NUNN. In your investigations, and you have done many
of them, was this a tough one to crack?
Mr. Edelman. Not really. As Mr. Webster stated earlier this
morning, we selected this school not on the basis of any inside in-
formation we had, but merely because of the drop in the loan port-
folio and the rise of the Pell Grant portfolio, which is exactly the
reason the Inspector General selected this school to audit.
We went out to Los Angeles to conduct our own field investiga-
tion in April or May of last year. Just prior — a day or so prior to
going out on that trip — we received some of the information that
the IG investigators had received in the course of their interviews.
We took that and took the follow-up steps to pursue those allega-
tions, and the flood gates opened and we found everything.
Senator NuNN. Can you conclude from this that the Department
is understaffed or the IG is understaffed? Do you have any per-
sonal conclusions?
Mr. Edelman. Historically, I think, as the record created by this
Subcommittee has shown, there has been a problem of under-
staffing at the Department, although I think in the last couple of
years there have been increased resources granted to it.
Senator NUNN. Are the investigators adequately trained?
Mr. Edelman. We have found over the years a problem with the
training of the program reviewers in terms of their not being given
any training to give them the ability to detect criminal wrongdoing.
27
These, however, were Inspector General criminal investigators,
which one would presume had a much higher level of training. I
am not personally familiar with the type of training that the IG in-
vestigators undergo, so I can't speak to that. We have been in-
formed that since the time of this case that the IG has undertaken
some changes in the way it handles its investigations, so that hope-
fully another case like this will not reoccur.
Senator Nunn. Is this an area that is too complex, too many
rules, too many laws, too many regulations?
Mr. Edelman. It is certainly a very complex area, and I think
in previous hearings we have commented on the complexity of the
regulatory scheme of the student financial assistance programs.
However, I think a big part of what is necessary and perhaps what
is lacking here is just that vigilance over the participating institu-
tions and perhaps a need for a healthy skepticism of what Depart-
ment employees are told by the institutions that they monitor. As
has been said in previous hearings by Department Inspector Gen-
eral witnesses, this is a program that is run on the honor system,
and unfortunately what we have are a lot of participants that are
not honorable, and I think those who oversee this program have to
realize that and have to approach it with that kind of an attitude.
Senator NuNN. Is the direct loan program that is being embarked
on now in the Department of Education also going to be run on the
honor system?
Mr. Edelman. From the indications that we have — and, again, I
believe the Department witnesses may be able to address this a lit-
tle better, but the information we have is that the system for the
direct lending program will mirror in many ways the Pell Grant
system in terms of schools being able to draw down the funds and
then being responsible subsequently for making any refunds for ex-
cess draw-downs.
Senator NuNN. Is the direct lending going to cover proprietary
schools?
Mr. Edelman. As far as we understand, they will, if they meet
the requirements, be allowed to participate.
Senator NuNN. Have you concluded anything about proprietary
schools, short-term proprietary schools, in terms of their unique-
ness and whether they ought to be separated from the more tradi-
tional higher institutions of education?
Mr. Edelman. On the basis of the investigations that we have
done over the years both in the student loan program and now our
investigations here in the Pell Grant program, in terms of the par-
ticipation of these short-term proprietary schools, it seems clear
that most of the problems are in that sector of the educational com-
munity. Moreover, these problems still remain, even after all of our
years of hearings at this Subcommittee, even after all of the
amendments which Congress has passed to the Higher Education
Act, and even after all of the changes which the Department of
Education has instituted to deal with these schools. And perhaps
it is time to consider whether those programs should be treated in
the same way that we treat major colleges and universities, 2- and
4-year degree-granting institutions.
Senator NuNN. Did you find any pattern here of schools that had
been primarily getting their students funding from loans? After the
28
1992 amendments passed and the Department of Education started
implementing those and cracking down somewhat on the loan pro-
gram, did you find a pattern among not just this school, but many
schools in moving much more strongly into the Pell Grant pro-
gram?
Mr. Edelman. Well, that was one of the primary concerns that
motivated our look at the Pell Grant program, that being that once
Congress passed the 1992 amendments, which in many ways tight-
ened up the eligibility requirements for the student loan, that those
abusive schools which perhaps saw the handwriting on the wall
may get out of loans and then go into the Pell Grant program
which, as you stated in your opening, does not have the type of in-
dicators which might alert the authorities to abuse that might be
ongoing.
We reviewed Department statistics and found that there very
well may be such a pattern. In the 10 years prior to the passage
of the 1992 amendments, there were only 80 or 90 schools that left
the student loan program and became exclusively Pell Grant pro-
grams. In only 2 years following the passage of the 1992 amend-
ments, that number jumped to, I believe, somewhere over 500
schools which left the student loan program and became exclusively
Pell Grant programs.
Senator NUNN. So on an annual basis, the number of them con-
verting from loans to Pell Grants went up 300 to 400 percent on
an annual basis?
Mr. Edelman. That is correct.
Senator NUNN. After the 1992 Act passed?
Mr. Edelman. Right, and of those schools that did that, more
than half were proprietary schools. So there does seem to be — this
is not to say that all of those schools that went from loans to grants
exclusively are abusive institutions, but there does seem to be a
pattern, and that may be something that the Department perhaps
should take into account in making its determinations in terms of
marshalling its limited resources for program reviews and audits.
Just to go back briefly to the Inspector General's investigation
and its report, we would note that the tone of the investigation re-
port seemed to be in conflict with the initial intention of the In-
spector General's office in 1992 to seek termination or prosecution
of lADE. It is apparent from Department documents that by De-
cember of 1992, the Inspector General's office had changed its mind
about lADE. What exactly led to that change, though, is not clear,
particularly since the Inspector General's investigation had uncov-
ered what would have seemed to be clear indicators of fraud and
abuse.
The Subcommittee staff began its own investigation of lADE in
early April of 1994. On approximately April 12 of 1994, the staff*
spoke with regional department officials about lADE and its sharp
increase in Pell Grant funding, and during the week of May 8
through 13, the staff conducted a field investigation in Los Angeles.
On May 17, only 4 days after the staff had concluded its trip to
Los Angeles, the Department's Region X office recommended that
lADE once again be placed on reimbursement. In a telephone con-
versation with the staff on May 23, 1994, Frank Dvorak of the De-
partment's Region IX office told the staff that the Department had
29
put lADE back on reimbursement because of concerns over unre-
solved findings of the Inspector General's audit. Mr. Dvorak then
freely admitted that the decision was made at that time because
of the involvement of this Subcommittee in investigating lADE.
On June 29, 1994, lADE, however, was taken off of reimburse-
ment. This time, it appears that the action was taken against the
wishes of the Department's program offices. From internal Depart-
ment documents and interviews with Department employees, it ap-
pears that the Department's Office of General Counsel unilaterally
agreed to a settlement with lADE under which the school would be
taken off of reimbursement in exchange for its establishing a
$500,000 letter of credit in the Department's favor. The General
Counsel agreed to this settlement despite the fact that the audit
report on which the reimbursement action had allegedly been
based had found lADE liable for over $1.3 million in improperly
disbursed Title IV funds.
Senator NUNN. So, in effect, the Department was owed
$1,300,000, but instead of continuing to not allow the school to
draw money in advance, to have them reimbursed after the fact,
they basically, in exchange for a $500,000 line of credit, put them
back on an advance payment basis?
Mr. Edelman. They gave them access once again to advance
funding for less than $.50 on a dollar.
For the past 5 years, this Subcommittee has been examining the
Department's ability to oversee the operation and management of
the Nation's federal student financial assistance programs. In hear-
ing after hearing, evidence has been presented documenting prob-
lems of mismanagement, incompetence, indifference, lack of re-
sources and training, lack of personnel, and perhaps a lack of will.
Time after time, the Subcommittee has heard fi-om Department of-
ficials under both Republican and Democratic administrations that
they are committed to reforming the process and improving the in-
tegrity of the programs they oversee.
Certainly, Congress has attempted to help the Department in
this regard. The passage of the 1992 amendments gave the Depart-
ment a significant tool with which to address the issues of institu-
tional integrity and program fraud and abuse.
Despite the high hopes generated by the Department's new ad-
ministration, the staff must once again report to the Subcommittee
about a massive failure on the part of the Department in carrying
out its fiduciary role of ensuring program accountability, a failure
which led to over $50 million of taxpayer money going to a school
which was little more than a Pell Grant mill. What is most disturb-
ing, however, is that the lADE case seems to be symptomatic of the
Department's longstanding and continuing failure to accept its fi-
duciary obligations and to adopt a consistent and aggressive over-
sight mentality.
It is not the staffs intention to paint all of the Department's em-
ployees with the same brush. There are many hard-working and
earnest employees within all levels of the Department who are
deeply committed to ensuring the integrity of the programs they
adrninister. The staff spoke with a number of such employees about
their own commitment and that of the Department. Unfortunately,
the feeling among these employees was unanimous that the De-
30
partment's approach to enforcement was uneven, inconsistent, and
easily susceptible to outside pressures, both institutional and politi-
cal.
For example, the staff was told that the statutory requirement
that institutions submit independent audit reports was "a joke" be-
cause the Department consistently had done nothing when institu-
tions failed to submit such a report.
The staff was informed that there are approximately 3^100
schools which have not submitted their required audits, going back
in some cases more than 5 years. According to employees inter-
viewed by the staff, until just last year when a new chief of the
Audit Resolution Branch was hired, no one in the Department had
ever taken responsibility for ensuring that audits are submitted as
required.
A number of employees were also concerned about the role
played by the Department's Office of General Counsel. The former
director of the Compliance and Audit Division told the staff that
during her tenure she engaged in numerous battles with senior
management and the General Counsel's office over enforcement is-
sues, and that while she ultimately was able to prevail in most in-
stances, she constantly had to defend, argue, and fight for the au-
thority to exercise enforcement decisions. She told the staff that the
General Counsel consistently intervened inappropriately in enforce-
ment matters both for and against taking enforcement actions, that
it viewed the program staff as incompetent and irrelevant, that it
refused to share information on matters in litigation until forced to
do so, and that it otherwise attempted to go beyond its role as legal
adviser and to control program decisions, particularly those involv-
ing settlement matters.
Other employees which the staff spoke with, including the former
director of the Institutional Monitoring Division and the former di-
rector of the Institutional Participation Division, told the staff of
what they perceived to be the Department's failure to apply the
laws and regulations governing the student aid programs in a con-
sistent and even-handed manner. They were particularly concerned
that senior management constantly sought ways to help schools get
off of reimbursement, especially in the face of any overt or implied
political pressure.
Mr. Jack Reynolds, the former director of the Institutional Mon-
itoring Division, told the staff that he encountered difficulties in
his efforts to apply the Department's certification regulations in an
even-handed and consistent manner. As director of the Institu-
tional Participation Division, Mr. Reynolds oversaw the Depart-
ment's certification and eligibility procedures. He stated that there
were a number of times when he had to, "go head to head" with
senior management over recertification decisions.
Mr. Reynolds felt that schools which could somehow plead their
case directly to senior management, sometimes with political influ-
ence, were often allowed to remain certified even when an objective
approach would find that they did not meet certification require-
ments.
The Department managers with whom the staff spoke were
unanimous in their view that intense political pressure was some-
times exerted on behalf of certain schools in other areas as well.
31
by Federal and State officials of both political parties, and that it
sometimes succeeded in obtaining preferential treatment for those
schools, contrary to the career staffs decisions and contrary to
their view of the appropriate enforcement of the law. In particular,
it was noted that political pressure appeared to dictate many of the
decisions with regard to program reviews, audits, and reimburse-
ment cases.
In addition to a lack of consistency and even-handedness, it was
also felt that the Department failed to pursue an aggressive en-
forcement approach. In this regard, the staff was told of the reas-
signment of a Mr. Lee Hardwick, the former director of the Institu-
tional Participation and Oversight Service.
Mr. Hardwick was apparently informed by Dr. David Long-
anecker, the Assistant Secretary for Postsecondary Education, that
he was being reassigned because he was "too aggressive," and be-
cause he "took this oversight stuff too seriously." Mr. Hardwick
confirmed this conversation to the staff.
Staff was also told of other areas in which career employees felt
that the Department was going backwards in its enforcement ap-
proach. They were particularly concerned about the area of pro-
gram reviews. Previous Department policy had always been to con-
duct program reviews with advance notice given to the institution
under review. In May 1994, however, the career management with-
in the Institutional Participation and Oversight Service, with the
concurrence of the Department's regional branch management, de-
cided to change that policy so that program reviews would be unan-
nounced. As the staff noted in its statement previously, advance
notice of various reviews allowed lADE to alter records and engage
in activities designed to deceive reviewers.
The decision to conduct Department reviews on an unannounced
basis took effect on July 1, 1994. In March 1995, barely 9 months
into the new policy, career staff was told by Marianne Phelps that
they would be given 1 week to justify the effectiveness of the
change or it would be reversed. Given the limited amount of time
for which the policy had been effective, it was difficult to gauge its
long-term impact. Regardless, Ms. Phelps decided that there was
insufficient support for such a policy and it was subsequently re-
versed. According to the career staff, before the division even had
a chance to notify the regional reviewers of the reversal. Dr.
Longanecker had already publicly announced it.
The information provided by these individuals is quite disturb-
ing. They are all individuals who took on their positions deter-
mined to correct longstanding Department problems. They were
charged with development of a plan to do this and it appeared that
they were making progress in this area. Indeed, their career
records reflect a history of outstanding performance ratings. They
had turned the various divisions and branches of the Institutional
Participation and Oversight Service into a team that was working
together to bring a consistent and even-handed approach to over-
sight and enforcement.
Each of the career managers with whom we spoke were either
involuntarily reassigned or asked for reassignment from their posi-
tions. Whether the changes wrought by these managers will con-
tinue under their replacements remains to be seen. The fact that
32
these individuals were either reheved of their duties or felt it nec-
essary to ask for reassignment gives the staff great reason for con-
cern. The staff must therefore question where the Department
stands with respect to its responsibilities for program accountabil-
ity.
Almost 2 years ago, Assistant Secretary Longanecker appeared
at this table and, as had his predecessors in previous hearings, as-
sured the Subcommittee that he would strengthen the Depart-
ment's monitoring and oversight efforts. Unfortunately, we are
back here once again with another multi-million-dollar failure on
the taxpayers' hands and the same old questions about the Depart-
ment's capacity and commitment to hold accountable those who
would abuse these important programs.
This concludes our presentation. Senator. We do have a bulky ex-
hibit containing numerous documents which we would ask be made
an exhibit to the record, and we would be happy to answer any fur-
ther questions you may have.
Senator NUNN. I think I have asked most of my questions as we
have gone along and I think that we had better get to our next
panel so we can complete this this morning. I thank both of you
for your hard work and all of the other staff who helped you.
Mr. Edelman. Thank you.
Senator Nunn. I will call the next three witnesses, Ms. Cornelia
Blanchette, who is the Associate Director of Education and Employ-
ment Issues, General Accounting Office; Mr. John Higgins, Jr., Act-
ing Inspector General, Department of Education; and Mr. David
Longanecker, Assistant Secretary for Postsecondary Education in
the Department of Education.
I will ask all of you to hold up your right hands and take the
oath.
[Witnesses sworn. 1
Before we get started with the testimony of our witnesses here,
an announcement. The Subcommittee had planned to call the own-
ers of lADE American Schools. The school was owned by Abraham
Stofenmacher and his sons, Bernardo, Alejandro, and Sergio, each
of whom was also a salaried officer of lADE. I have been advised
by the staff that Abraham, Alejandro, and Sergio have voluntarily
absented themselves from reach of service of congressional sub-
poena. In other words, they are out of the country.
I would further note that the Stofenmachers are Argentine na-
tionals with extensive business interests in Argentina and South
America, and with other schools, I am told, going on in those coun-
tries. Certainly, it is my hope that the officials in those countries
will take note of these hearings and take appropriate action, both
civil and otherwise, if there are other actions that are indicated.
Bernardo Stofenmacher, who, in addition to being an owner, was
also CEO of lADE, was served with a subpoena and we were hope-
ful that he would be able to provide valuable information to the
Subcommittee as a witness. In response to this subpoena, however,
attorneys for Mr. Bernardo Stofenmacher informed the Subcommit-
tee orally and by letter that their client, if called to testify, would
assert his constitutional privilege against self-incrimination under
the Fifth Amendment and refuse to answer any of the Subcommit-
tee's questions regarding the matter under investigation.
33
We also have a practice of usually calling Fifth Amendment wit-
nesses because we have had occasions where they decided to testify
even after the Subcommittee had been notified by their attorney
that they would assert their Fifth Amendment privileges. We were
planning on having him here today to assert his privilege, but we
have received medical information from his doctor in writing about
immediate medical concerns of his wife, and in light of that we
have not compelled his attendance today, since he was also going
to assert his Fifth Amendment privileges. Without objection, these
letters will be made a part of the record. ^
Senator NUNN. This Subcommittee always has, and will continue
to respect the right of any individual to avail himself of the privi-
leges under our Constitution. Unfortunately, the three remaining
family members who owned lADE are outside the jurisdiction of
this Subcommittee, as well as the reach of Federal law enforcement
authorities at this time. We were unable to locate them after the
school closed its doors in March of this year.
In my view, it would be tragic if they never have to answer for
their abuses in either a civil or a criminal forum for the kinds of
abuses that we have heard documented here today. It is indeed a
regrettable commentary that this school was operated by individ-
uals with so few ties to the community they exploited that they
could merely leave the country as soon as their misconduct was ex-
posed, and it is particularly tragic not only for the taxpayers, but
also more importantly for the students who have been deprived of
an education or skill training.
At this point, I will ask Dr. Longanecker if he would like to lead
off.
TESTIMONY OF DAVID A. LONGANECKER,i ASSISTANT SEC-
RETARY FOR POSTSECONDARY EDUCATION, U.S. DEPART-
MENT OF EDUCATION; ACCOMPANIED BY DONALD R.
WURTZ, CHIEF FINANCIAL OFFICER
Mr. Longanecker. For the record, I am David Longanecker. I
am the Assistant Secretary for Postsecondary Education within the
Federal U.S. Department of Education. I want to thank you for the
opportunity to be here again today, if for no other reason than to
help set the record straight.
Obviously, this is a little different testimony than the one I had
before. When I last appeared before you, I was basically promising
to do something, and today I am here to talk to you about what,
in fact, we have done. I am glad to do so, though, because I think
we have made substantial progress and I want to have the chance
to share that with you.
I am accompanied today by Don Wurtz, who is the Chief Finan-
cial Officer of the Department. Don does not have any prepared re-
marks, but is available to respond to questions that you might
have.
I have included my extended remarks for the record, and if it is
OK, would have those accepted for the record, but would speak
from abbreviated remarks.
iSee Exhibits #37 and #38, pages 195 and 197.
*The prepared statement of Mr. Longanecker appears on page 114.
34
Senator NUNN. Without objection.
Mr. LONGANECKER. I would like to address three areas today.
First, I would like to describe our substantial efforts over the past
2 years to improve our management and oversight of these impor-
tant Federal programs. Second, I will identify the areas that need
further work. And, third, I will share a proposal to adopt a fun-
damentally different, and we are convinced, far better approach to
oversight that we intend to pursue, hopefully with your assistance.
First, let me describe what we have done to improve these pro-
grams and the proof we have that those efforts are working. We
are much tougher about letting risky schools into these programs,
in the first place, than we used to be. As you can see from the
chart that I have provided up there. Chart 1, institutions that
apply for recognition in our programs are much more likely to be
denied certification than in the past. They are about two-and-a-half
times more likely to be denied than was the case in 1990.
Indeed, the more rigorous review appears to be dissuading insti-
tutions from seeking recognition, with the average number of insti-
tutions applying for recognition decreasing by one-third over the
last 4 years. Again, you can see that on the chart.
We are also much tougher about letting risky schools continue to
participate in our programs. The share of schools seeking
reapproval that are denied has increased dramatically, from 15
percent in 1990 to 23 percent last year. Six hundred institutions,
about 8 percent of all of the institutions that currently participate
in our programs, have been placed on provisional certification, and
we have begun performing recertification reviews of all 7,200 insti-
tutions, many of which have not been recertified in 10 to 20 years.
We have added a number of management controls to monitor all
participating institutions. We now have one Social Security
match — that checks individuals' name and date of birth against
their Social Security number — up and running, and another which
will help us determine citizenship that is in the process of being
developed. That latter one is a response directly to a report of our
Inspector General.
We have just recently brought up two major databases, the Na-
tional Student Loan Data System, which will help us improve not
only the management of the loan systems — it has that name to it —
but will also help us improve the management of Pell and other
student aid programs. We are also bringing up the Postsecondary
Education Participant System. Both of those data systems correct
concerns that were directly addressed by the GAO report, and both
are now up and running. They will be fully populated by the end
of this year.
Senator NuNN. Dr. Longanecker, a general question. How much
relationship and analogy is there between the Pell Grant program
as now administered — I am not talking about the changes you are
talking about making, but right now — and the direct lending pro-
gram that you are about to undertake?
Mr. Longanecker. Implementation of the direct lending pro-
gram has actually helped us improve the management of our other
student aid programs because it has allowed us to modernize a
number of other areas of the student aid delivery system. This situ-
ation arises because we have basically one student aid delivery sys-
35
tern. So, as we deliver student loans using an improved, systems-
enhanced process for determining student eligibility and appl5ang
for aid, direct lending is giving us the capability to modify our
other computer systems so that they can be as slick, if you will, in
providing us the kind of management controls that we have built
into that new system that we really need in our other systems.
Senator NUNN. Well, we have heard testimony this morning that
students never actually have to sign off on any document, or in this
case they didn't, to get Pell Grants — at least no document that is
in the possession of the Department of Education. Is that accurate?
Mr. LONGANECKER. They have to sign the electronic Student Aid
Report (SAR), but that is not in our presence. They must sign a
promissory note for purposes of the student loan program.
Senator NUNN. But I am talking about Pell Grants. Students
don't actually have to sign anything that is in your possession that
tells you that they know that their Pell Grant money is going to
the school?
Mr. LONGANECKER. That is correct.
Senator NUNN. So, in effect, a school that wants to commit fraud
can basically make up the names of students and lie to you about
what they have got in their file in terms of something that stu-
dents sign, lie to you about whether the student is in school, and
simply get checks from the Government?
Mr. LONGANECKER. If there is fraud and forgery, there is a possi-
bility for that to go undetected. I have learned a great deal today,
and I am as appalled by what we are hearing today as you are. It
appears that that may well have happened in this case, and that
is terrible and we need to find better ways to detect fraud. Yet we
have to, I think, remember that we want a system that still is
manageable and that gets the funds out to the legitimate providers.
Senator NuNN. Right. That is the dilemma. I understand that.
Mr. LONGANECKER. Yes.
Senator NUNN. But in the loan program, you have to have a note
in your file, or the bank does or somebody does.
Mr. LONGANECKER. Yes, there needs to be a signed promissory
note.
Senator NUNN. Some independent party other than the one re-
ceiving the money — that is, the school — has to have something
signed by the student, right, in the loan program?
Mr. LONGANECKER. We receive a signed promissory note in this
case. I will get back to you to provide you precisely what is entailed
in the case of direct student loans. I would rather not say some-
thing that I am not absolutely positive of.
Senator NuNN. It just looks to me on the surface of it, and I will
await your answer, that what you have got here is a program
where the person who is intended to be the beneficiary never is in
the loop on the Pell Grant program in terms of any direct acknowl-
edgement to the Department of Education, either through a note
or through a sworn statement, that they indeed are going to receive
this education and it is their intent to.
Mr. LONGANECKER. Well, we do review those ESAR's to make
sure that they are available, but we don't verify 100 percent of
them.
Senator NuNN. And you send the money out in advance?
36
Mr. LONGANECKER. Yes, that is correct. We send the money out
to schools.
Senator NuNN. So the beneficiary of Federal money basically
goes to a third party who has a pecuniary interest without the ben-
eficiary ever having been in the loop as far as direct acknowledge-
ment to the Department of Education?
Mr. LONGANECKER. That is correct.
Senator NuNN. It seems to me you need to take a look at that
because that removes the whole customer check and balance.
Mr. LONGANECKER. Yes.
Senator NuNN. I mean, in the loan program they have to pay the
money back. In the Pell Grant program, you are removing the ben-
eficiary or the client, the one you are trying to help, from the whole
process.
Mr. LONGANECKER. One of the projects that I would mention, and
that I will be mentioning in a minute, is that we are developing
an entirely new computer system for the delivery of our student fi-
nancial aid that will interrelate all of our databases so that we can
follow each student. We are hopeful that via that process we can
eliminate the need for advance payment, that we can have a just-
in-time delivery which would not have money out there, essentially,
in advance, and that would require the appropriate validations.
With current modern technology, we ought to be able to achieve
that.
Senator NUNN. You would acknowledge that based on what we
have heard this morning, a school that can get $58 million in a pe-
riod of 5 or 6 years at a rapidly escalating rate from the Pell Grant
program and people who can remain undetected and leave the
country before any penalty is meted out — that is a pretty enticing
invitation to anybody who has bad motives around the country or
around the world, isn't it? I mean, isn't that a sort of an invitation
that we have got an open bank with no security guards and no tell-
ers?
Mr. LONGANECKER. Yes, but I think as I can describe to you,
there are pieces of our gatekeeping that are in effect today that
would prevent an lADE from occurring today. Now, it is still con-
ceivable that a clever criminal may be able to achieve ill-gotten
gains in this program, but I honestly believe that, in this particular
case, there are three or four things that we have put in place as
a result of our heightened management, and as a result of the
amendments of 1992, that would have prevented this.
Senator NuNN. Well, I know computers can do wonderful things
and I don't denigrate computer assistance here, and I hope you can
update your computers, but it seems to me that somehow or an-
other you have got to put the beneficiary in the loop. That is the
ultimate safeguard. That is the ultimate person to complain if they
get ripped off. That is the ultimate person that wants the education
and is being deprived of it when you basically have a school that
takes money and spends it on everything but books and edu-
cational materials.
So when you don't have any contact between the beneficiary and
the Department of Education, it seems to me you really have re-
moved the ultimate check and balance, if there is going to be one.
37
other than purely Grovernment rules, regulations, bureaucracy,
checks, accountants, all of the mechanisms.
Mr. LONGANECKER. I am not going to argue with your point. That
is a very legitimate point, and I think we have some work yet to
do on that. I think the proposal that we will lay out here later in
my testimony also allows us the possibility of doing some more in
that regard.
Senator Nunn. I don't know whether you want to get so comput-
erized and electronically capable that the students don't even ever
have to sign a check that is supposed to be for their benefit. It
seems like we have gotten that far.
Mr. LONGANECKER. We have gotten that far for the convenience
of the schools and to some extent for the convenience of the stu-
dents. But particularly with certain sectors of the community we
are dealing with, perhaps we have gone too far, and I will come
back and talk to you about that.
Senator NuNN. I would invite your attention to that area. I don't
pretend to have the answer, but it seems to me that the student
has got to be in the loop somewhere.
Mr. LONGANECKER. Yes. I would tell you that we also think we
have improved by investing a great deal of effort and resources in
improving our gatekeeping. We have hired about 100 new staff. We
have developed a training academy for them. We have armed them
with new technology. All of them have lap top computers with a
substantial amount of customized software to help them look at the
schools. We have also given them training in how to detect fi-aud
and abuse, which is related to what we are talking about today.
Now, I am concerned about the comments that you received from
our staff. I would tell you that I can pretty much imagine who
those staff were, and I have a great deal of respect for many of
them. They are really superb individuals, by and large. As you
might expect, my interpretation of the events that led to their leav-
ing their current jobs is somewhat different than theirs might be.
I would rather not go into great detail on that. Those are personnel
issues. But I would like to tell you that we are committed. There
is not only the ability, but a very strong will to be tough gate-
keepers, and I think, as I will show you, that is evident by our per-
formance.
The investment we are making is paying off. As Chart 2 shows
you, over 600 institutions have been removed from Title IV eligi-
bility since Dick Riley came to town. That is more than twice the
number for the same period before the new administration took of-
fice. So, we are denying more institutions, we are getting rid of
more institutions, and we are watching those that are in the pro-
gram much more closely than we were 2 years ago when I last ap-
peared before you.
Yet, we are still preserving access to these programs, with more
students receiving assistance today than ever before, even though
the number of institutions participating in the program is at a 15-
year low. So we think that is good. But as lADE shows — I have to
get it right here
Senator NuNN. You can call it anything you want. I don't know
what is correct. [Laughter.]
38
Mr. LONGANECKER. lADE demonstrates there is much more to be
done. We are totally redesigning our computer system. I mentioned
that to you. That project is now slated for completion either late
this fall or early next winter, and we are doing more of the same
kinds of things that we have done, trying to improve particularly
our gatekeeping system. We are doing a great deal of work right
now in our Institutional Participation and Oversight Service, look-
ing at reengineering that entire process to improve it.
Senator NUNN. I asked you last time you were here whether you
were able to handle the political pressures when you start remov-
ing a school from eligibility. I will ask you the same question again.
You have removed an awful lot of Title IV participants from the
program. Did you get extensive political pressure to not do that
from Capitol Hill or anywhere else?
Mr. LoNGANECKER. One of the things I have learned is there are
a lot of bad institutions in the country, but none are in anybody's
congressional district. Yes, we have a lot of involvement with the
Congress, but I do not believe we have had unrealistic pressure.
Senator NuNN. Are you withstanding the pressure?
Mr. LONGANECKER. Yes, absolutely.
Senator NuNN. Are you telling people, look, you have got a bad
apple here and we are going to get rid of them?
Mr. LONGANECKER. Yes. I think I have shown you evidence to
suggest that. I think career staff sometimes don't appreciate that
it is entirely legitimate for Members of Congress to represent the
interests of their constituencies. So when they call and they ask for
us to investigate a concern that they might have, we do that, and
on occasion I would tell you that we find indiscretions on the part
of our staff. And when that is the case, we will not back up our
staff if they have made mistakes.
Where we have a strong case against an institution, we pursue
that. We try to be sensitive to the needs of the institutions and to
the students and to the Members of Congress that we are working
with, but we are going to be aggressive, and I think our evidence
in the aggregate and on specific cases would suggest that.
Senator NUNN. So you are not going to leave here in IV2 years
and come out with a statement saying you would have cleaned this
thing up if it hadn't been for pressure from Capitol Hill?
Mr. LONGANECKER. No, no. I expect to be here again before you
in 2 more years, and then 2 years after that.
Senator NuNN. You are able to handle the pressure?
Mr. LONGANECKER. Yes.
Senator NuNN. And you are able to do your job?
Mr. LONGANECKER. Yes.
Senator NuNN. Protecting the taxpayers and the students?
Mr. LONGANECKER. Yes, and I have got a lot of support from my
bosses to do that. Let me tell you the way Dick Riley told it to me.
He said our administrative excesses should not be the reason that
we close an institution, but their administrative malfeasance
should be, and so that is what we are looking for. We don't want
to essentially impose a system on postsecondary education that
makes it impossible for people who want to provide good education
to do that. But if they are incapable of doing that, we want to go
39
after them, and he shared that with me personally. He has met
with all of my managers and shared that with them as well.
Senator NUNN. OK.
Mr. LONGANECKER. I mentioned that we are going to continue to
try to do a better job. There are some ways in which we could use
your help. In the testimony I have provided, the longer version, I
have described four areas involving the need for personal financial
guarantees, for financial officer liability, for the so-called 85-15
rule, and for liabilities for costs incurred while cases are under ap-
peal.
Senator NuNN. Now, you are saying you are going to try to make
the proprietary school people more accountable and you need legis-
lation to do this. When they basically sign up, you want some guar-
antee for them to put their personal assets behind
Mr. LONGANECKER. That is correct.
Senator NuNN. Behind what? What is the extent of their liability
you are talking about?
Mr. LONGANECKER. Well, we believe that if they have liabilities
associated with their involvement in the program, then we think
we ought to be able to go after their personal liabilities, as well as
their corporate liabilities. It is so easy under the current law to es-
sentially estrange themselves from any responsibility or personal
liability.
Senator NUNN. A bank would do that, would they not?
Mr. LONGANECKER. A bank would do that. All we are asking is
that we be able to do the same thing that a responsible banker
would do.
Senator Nunn. Are you going to have to have a legislative
change to do that?
Mr. LONGANECKER. Yes.
Senator NuNN. Have you made a request yet?
Mr. LONGANECKER. No. I am sort of putting you folks on notice
today that we will be coming forth in those four areas, and that
we will hope to get your help in those areas.
Senator NuNN. Would this just be for proprietary for-profit
schools or would this also be for non-profit institutions?
Mr. LONGANECKER. We would only propose that for for-profit in-
stitutions. It is really the only place where
Senator Nunn. Are you going to guard against people switching
from profit to non-profit and basically then paying themselves all
the salaries — you know, a non-profit can eat up all the salary.
Mr. LONGANECKER. Yes, again, all of these are balancing issues.
There are times when it is appropriate for an institution to change
its stature. What we have proposed is that when they change from
for-profit to non-profit that we put them on provisional certifi-
cation, and that for a period of 3 years they remain treated as
though they were a for-profit institution so that we can see that
they just aren't a sheep in wolves' clothing.
Senator NUNN. You are going to do that as part of a legislative
change?
Mr. LONGANECKER. Or a wolf in sheep's clothing. I got that back-
wards, I guess.
Senator Nunn. Can you do that in a regulation?
40
Mr. LONGANECKER. No, we can't do that in a regulation. We will
need some help on that.
Senator NUNN. That is going to take a change in law?
Mr. LONGANECKER. Actually, we have done that in regulation,
but we may need some help from you because that is an area
where a number of Congress people have raised some concerns
about whether we have the regulatory ability to do that. We did
institute these measures in regulation, and we believe we have the
regulatory authority to do so. If it is challenged, however, we may
need some help.
Senator NuNN. Now, you mentioned the 85-15 rule. Over my
strong objections, Congress put a moratorium on that last year.
Would you explain briefly for those who may not have followed this
what that rule is and what the Department of Education's position
is on it?
Mr. LONGANECKER. That rule essentially says that an institution
must receive at least 15 percent of its revenue from sources other
than Federal student financial assistance or it cannot participate
in the program. We support that rule. That was a rule that was
passed with very broad support initially and then was delayed for
a year in its implementation. I might mention as an aside that had
that been in place here, we might have been able to come down on
this institution last July, but it was delayed for a year.
Senator NuNN. Is the Department going to fight hard?
Mr. LONGANECKER. We will fight for that. We do have a sugges-
tion, though. One of the things that has made it difficult for some
people to support 85-15 is that it is possible to have a very con-
structive institution that serves very poor people and, as a result,
might have more than 85 percent of its revenue coming from stu-
dent financial assistance. So we have suggested that when they go
through, if that is a problem, that they add a section that provides
for mitigating circumstances for institutions that can prove that
they are really serving their students well. We suggested using the
same criteria that are in the law for short-term vocational pro-
grams; that is, that the institution be able to demonstrate that it
has a 70 percent graduation rate and a 70 percent placement rate.
Senator NuNN. And then let the Secretary have a waiver to the
normal 85-15 rule?
Mr. LONGANECKER. That is correct.
Senator NuNN. Is that part of another legislative request you will
be making?
Mr. LONGANECKER. Yes. Those are all part of the packages that
we will have coming forward. Right now
Senator NuNN. They are not here yet, though, right?
Mr. LONGANECKER. Right now, you don't need that because as of
July 1, 85-15 went into effect, and so we have that as current law,
and frankly we are comfortable with it. We wouldn't mind that
change for mitigating circumstances. If it is challenged, then we
will need some help.
Senator NuNN. OK, go ahead. What other changes are you going
to be proposing?
Mr. LONGANECKER. Perhaps the greatest significance is that we
really believe that we need your help in fundamentally restructur-
ing and improving the overall approach to oversight of these pro-
41
grams. We can do some of what we need to do via regulation and
simply by changing the way in which we do business, but some will
require legislation and we will be seeking your help in that.
What we are proposing is a common-sense approach to gate-
keeping. It is a very simple concept. It is based on three very
straightforward tenets. As you can see on the chart, the first is
that we believe that policy and practice should differentiate be-
tween for-profit and not-for-profit institutions, and between degree-
granting and non-degree-granting programs.
Experience shows us that fairness can only be achieved if we re-
spect and admit that different institutions are different. You know,
we talk about the diversity of American higher education being one
of its strengths, and yet we don't allow our policy to respect and
reflect that diversity, and we think it only makes sense to do that
in our policy.
Second, we believe that the policy and practice should differen-
tiate on the basis of performance. We don't have to worry much
about oversight for high-performing institutions, and yet we put
them through a great deal of administrative burden because we try
to treat all institutions the same. We shouldn't be doing that. We
would suggest that we place our oversight, those limited resources
we have, on institutions in which Federal dollars in student edu-
cation are most at risk.
As you can see from Chart 3, our problems are concentrated in
the short-term proprietary sector, so most of our attention should
be focused on the institutions in this sector. This is just one indica-
tor. This is the default rates, and you can see where the default
rates are highest.
Third, we believe that providing better information to students
about educational programs and student outcomes will lead to bet-
ter decisions about where a person chooses to get their education,
particularly if that information is provided through honest brokers
rather than necessarily by the provider of the education. In our
education and training initiative, we have proposed one-stop career
centers to provide that information, particularly for students in
short-term vocational programs.
So we bring to you a fairly simple story today. We are dedicated
to improving the management of these programs. We think our
performance demonstrates that, particularly when you consider the
management deficit from which we began 2 years ago. The proof
of the pudding is in the results. Fewer bad apples are getting in;
more bad apples are being eliminated.
We certainly have some continuing work to do. We are dedicated
to that improvement. We are going to try to do that through im-
provements in day-to-day management, and we are proposing this
new gatekeeping system that will treat different institutions fairly
by treating them differently; that will respect and reward high per-
formance and focus on our efforts on poor performers; and that will
provide better information to consumers so that they can make bet-
ter choices.
I hope we are able to convince you that we are on the right track
and that we are dedicated to this. We have the same objective you
have — to provide a quality education to students, but to assure that
Federal taxpayer dollars aren't wasted in the process. We want to
42
provide you management of programs that will make you proud of
the programs we are entrusted with. Hopefully, we will be able to
convince you of that, and I hope to be able to come back in 2 more
years and tell you about some more progress we are making.
Senator NuNN. Thank you, Dr. Longanecker. What did you hear
this morning on the lADE case that either surprised you or said
to you we had better do something about this?
Mr. Longanecker. Well, actually, and this may surprise -you,
most of what I heard today I heard for pretty much the first time
in terms of the specifics. I knew the chronology of our involvement,
but I didn't know the specifics of the abuses that were occurring,
and that is because our Inspector General is very good, in an open
investigation, about not sharing anything that he knows. So many
times Jack Higgins has said, 'you would be interested, but you
don't need to know, Dave,' and so it was very interesting.
Obviously, I was appalled by what I was hearing today. I think
it does suggest to us, as we look at the lADE case, that one of the
things we need to do better is to have much better collaboration
within the Department of Education and between our partners. In
fact, as my longer testimony talks about, we are beginning a very
disciplined process of working with the accrediting agencies and
the States, with the IG's office, the Office of General Counsel, and
our own shop internally to make sure that we have the connects
that bring us together logically.
Almost all of us, taken piece by piece with one or two exceptions,
can defend our actions on lADE, but when you add them together
some of the parts don't equal the whole. So they suggest that if we
had all known better what was going on — I hadn't heard of lADE
until March of this year — we should have had much better collabo-
ration. I think one of the lessons for us, and we have already begun
to do this, is to try to provide more matrix management so that we
have the connections that are necessary.
Senator NuNN. I will turn to Mr. John Higgins, who is the
Mr. WURTZ. Mr. Chairman, could I just add one comment to
that?
Senator NuNN. Yes.
Mr. WURTZ. You asked with respect to lADE, and I do think the
1992 amendments would have helped us substantially here. I, too,
have heard the actual events that took place here and
Senator NuNN. Speak right into that mike, if you would.
Mr. WuRTZ. I, too, just heard the events for the first time this
morning of what actually took place there, and as an auditor and
a financial person for some 35 years, I find it appalling, frankly.
But I do think that the 1992 amendments that require annual au-
dited financial statements — and this is one of the things we never
received from lADE, would have detected this fraud. I can assure
you that a good audit would have picked this up because all an
auditor had to do was say the audit steps for the cash reconcili-
ations, the bank reconciliations, and you start seeing where the
money is going, what actually came in, and where it is going out.
You would have started picking this up immediately. You would
have confirmed with students, did they attend. That is part of a
confirmation process that is normal in financial audits. These are
the things we are requiring today take place in the school audits.
43
Senator NUNN. When did you start requiring that?
Mr. WURTZ. That was required in the 1992 amendments, and the
first year they were due was the 1994 year. So, unfortunately, with
lADE, in this case their first annual audited financial statement
would have been due for their year ended December 31. I believe
they were on a December 31 year-end as a proprietary entity.
As testified in the deposition by Mr. Williams, it was obvious
that he knew the audit was coming up and that this kind of thing
would have been caught at that point in time, and I think they cer-
tainly realized the jig was up at that point. So I think we have in
place something that is going to give us a better first line of de-
fense on this that will help substantially in this process.
Senator NuNN. Thank you. Mr. Higgins, Acting Inspector Gen-
eral.
TESTIMONY OF JOHN P. fflGGINS, JR.,i ACTING INSPECTOR
GENERAL, U.S. DEPARTMENT OF EDUCATION
Mr. Higgins. Mr. Chairman, I think I want to thank you for in-
viting me here today to discuss the abuse of the Pell Grant pro-
gram.
You requested that I provide an update of issues that surfaced
in this Committee's 1993 hearings, that I discuss any new issues
we have identified since 1993, and that I describe the work that
we performed at lADE American Schools in California. These areas
are detailed in my written statement which I have provided for the
record.
In our 1993 testimony, we explained that by virtue of the pro-
gram's design, the Department relies on the integrity of the partici-
pant organizations and agencies to assure that grant awards are
administered properly, refunds are made, and expenditures are ac-
curately reported to the Department. Also, at that time we ex-
pressed our hope that many of the provisions enacted in 1992
would serve to strengthen the Department's ability to monitor the
performance of participant organizations and agencies.
Mr. Chairman, if I could leave one impression with the Sub-
committee this morning, it would be that our hopes have not mate-
rialized, in particular, in the gatekeeping area. Legislative changes
enacted to ensure satisfactory performance of schools and other
Pell program participants are not working as envisioned. The
1992
Senator NuNN. Are not working as
Mr. Higgins. Envisioned.
Senator NUNN. Are not working as envisioned. Mr. Higgins, if I
could get you to pull that mike right up?
You are sa3ring as of right now, they are not working as envi-
sioned?
Mr. Higgins. Correct.
The 1992 amendments sought to emphasize State roles and re-
sponsibility for Program outcomes by creating State Postsecondary
Review Entities which would review the performance of participat-
ing schools against measurable performance standards. It appears
that this function will not be funded. Therefore, the States' role of
1 The prepared statement of Mr. Higgins appears on page 126.
44
overseeing SFA programs falls again with the State licensing agen-
cies, which this Committee recognized in 1990 as being insufficient.
Further, Congress required that accrediting agencies must de-
velop institutional quality standards, such as course completion
and job placement rates, to evaluate performance of schools they
accredit. Reviews we have conducted at 7 accrediting agencies con-
cluded that accrediting agencies have made little or no progress in
developing and implementing the new congressionally-mandated
performance standards.
Considering the findings of our reviews, we are concerned wheth-
er there will be any meaningful reform in the accreditation process,
despite the statutory mandate for accrediting agency standards.
Through the SPRE program and increased requirements on accred-
iting agencies, Congress intended that there be greater measure-
ment of schools' performance in Pell and other Title IV programs.
Over the years, we have reported that individuals were trained
with a heavy investment of Federal funds for jobs that do not exist.
The current method of funding vocational training requires no
consideration of labor market needs and no performance standards
for student achievement. This is illustrated by a recent investiga-
tion of three cosmetology schools. These schools received $6.7 mil-
lion over 4 years to educate 4,300 students. Of the 4,300 students,
only 80 of them passed the State license exam, at a cost to the tax-
payer of $84,000 per license.
Senator NuNN. In other words, there are schools that are getting
money that are training people for jobs that don't exist?
Mr. HiGGlNS. Correct.
In another instance in which 3,000 students were enrolled at five
schools, only 14 percent of the students completed the necessary
training and also received a license.
A third legislative fix that appears to have proven less than ef-
fective relates to the ability-to-benefit provisions. To be eligible for
Title IV assistance, students without high school credentials must
pass an approved test. In 1992, Congress authorized the Secretary
to approve independently administered tests and to specify the
passing score. However, the Department has yet to publish final
regulations implementing that provision. Therefore, the issue re-
mains unresolved and the potential for abuse still continues.
Senator NUNN. Mr. Longanecker, when will those regulations be
issued?
Mr. Longanecker. We are still reviewing those. We actually had
that package completed, but could not get it approved through all
of our clearances within the administration. While it is unresolved
in that respect, we are operating under guidelines that we believe
we can enforce and that carry the force of law. So we are working
under those guidelines that were published.
Our dilemma is that there are questions about the validity of the
approach that is currently existing in law. It is really an area
where we probably need to come back and change the underlying
law to get something that really talks about ability to benefit.
Senator NuNN. Go ahead, Mr. Higgins.
Mr. HiGGINS. The conversion from clock hours to credit hours as
a measure of program length continues to be a problem. By using
credit hours instead of clock hours for measuring their programs,
45
trade schools are able to increase their Federal student aid receipts
without adding significantly, if at all, to the instructional content
of their courses.
The Department published regulations needed to address this
problem. Until recently, these regulations have been enjoined from
enforcement. It will now be up to the Department to implement
these new regulations.
Senator NuNN. How have they been enjoined? You mean by the
court?
Mr. HiGGlNS. Yes, sir.
To some extent, the abuse has and will continue during the im-
plementation. This problem will also exist for those schools that
have been approved for the conversion until they come up for
recertification. That is also at issue.
Through the 1992 amendments. Congress attempted to prohibit
the award of Pell Grants to incarcerated students. However, there
are loopholes that weaken this prohibition. We found in a recent
audit that a school that enrolls prisoners from local and county
jails may continue to participate in the Pell Grant program. Unless
the Department can address this longstanding problem administra-
tively, additional legislative action will be needed. It does not mat-
ter even if they are Federal or State crimes they were convicted of
as long as they are sitting in the local jail.
A provision referred to as the 85-15 — well, we have already
talked about that, the 85-15 rule. I will skip that to speed this up.
The next issue that we also talked about was owner's liability.
We are very supportive of what
Senator NuNN. Let me just ask you on the 85-15 rule, from your
perspective as Acting IG, do you think that the 85-15 rule should
be left alone by Congress and go into effect as it did on July 1st?
Mr. HiGGiNS. I certainly do. We hope that it will not be post-
poned again. We have written to several Members of Congress on
that issue specifically.
Mr. Chairman, 3 years ago the Congress legislated many provi-
sions to strengthen the performance of schools participating in the
Pell Grant program, and since that time the Department has at-
tempted to strengthen its monitoring of these schools. However, as
I have noted here, many of the statutory provisions are not work-
ing as envisioned and it appears that a planned budget reduction
will seriously weaken monitoring efforts by my office and, I as-
sume, the Department.
Senator NuNN. You are about to get cut?
Mr. HiGGlNS. Yes. We are authorized around the neighborhood of
355 to 360. We are probably going to have to go down to 299 to
310.
Senator NUNN. Are those going to come out of this area? Will
those inspectors come out of this area?
Mr. HiGGiNS. Yes.
Senator NuNN. Isn't that like leaving the back door open and re-
moving the guards?
Mr. HiGGlNS. We think so. This also makes it very important
that the issues that I just discussed that are front-end controls be
implemented.
46
In regard to our work at lADE, we performed audit and inves-
tigative work in 1992 and 1993. We also are currently conducting
a criminal investigation there.
Senator NUNN. You are doing that in connection with Justice or
are you doing it where you may turn it over to Justice?
Mr. HiGGlNS. No. We are doing it in connection with Justice and
the FBI. The first criminal case
Senator NUNN. Do we have extradition treaties with Argentina?
Mr. HiGGlNS. I don't know that we do, but I am sure that they
will pursue them, and we will naturally ask them to.
Senator Nunn. Mr. Longanecker, have you contacted the Argen-
tine education authorities about the rip-off that has gone on here?
Mr. Longanecker. No, I haven't. I was unaware that this was
a group that was operating in Argentina.
Senator NuNN. My understanding is they are operating in more
than one Latin American country.
Mr. HiGGlNS. Thirty-two countries, I believe.
Senator NUNN. Thirty-two countries they are operating in?
Mr. HiGGiNS. That is what I heard, yes.
Senator Nunn. Around South and Central America?
Mr. HiGGiNS. Yes.
Senator NuNN. Thirty-two schools?
Mr. HiGGINS. Thirty-two schools, yes.
Senator NUNN. Thirty-two schools in how many countries?
Mr. HiGGlNS. I don't know how many countries. I am sorry.
Senator NuNN. It seems to me it would be a good idea to get in
touch with — just as a matter of information and courtesy — to let
the people wherever they are operating understand.
Mr. Longanecker. For the reasons I stated earlier, our knowl-
edge of this particular issue has been somewhat limited, but as we
become apprised of that, I will be glad to. I certainly will take that
on as one of my responsibilities.
Mr. HiGGlNS. The first criminal case was not worked sufficiently
and a premature decision was made to close it. Our audit work, al-
though somewhat expanded in scope, found no material evidence of
fraudulent activity.
Senator NuNN. Who made that decision?
Mr. HiGGlNS. To close the
Senator Nunn. To close it.
Mr. HiGGlNS. The regional Inspector General.
Senator NuNN. Do you think that was a mistake?
Mr. HiGGlNS. Definitely.
Senator Nunn. Was that reviewed up the line or was it just a
regional decision?
Mr. HiGGlNS. That was a regional decision at that time. It is no
longer a regional decision.
Senator NUNN. So you have taken steps to change that?
Mr. HiGGlNS. Yes.
Senator NuNN. That was a mistake?
Mr. HiGGiNS. That was definitely a mistake.
Senator NUNN. Was there any wrongdoing there or was it simply
negligence?
47
Mr. HiGGlNS. I wouldn't really say it was negligence. In 1992, we
identified the need for 640 people to do the job that we have ade-
quately. Like I just told you before, we have a staff of around 350.
Senator NUNN. So you have got half of what you need right
now — you have got about 55 percent of what you need right now
and you are being cut some more?
Mr. HiGGlNS. Right.
Senator NuNN. Isn't this going to cost the taxpayers money?
Mr. HiGGlNS. I personally think it will. Over the years, we have
always returned more — we have always gotten back more than our
offices cost the taxpayers.
Senator NuNN. I have a great fear that what we are going to see
here is cuts in personnel that manage programs with programs not
being reduced commensurate with the personnel — in effect, leaving
the back door open with nobody there guarding the money, not just
in this area but in other areas, too. I mean, I think that is going
to be the result of this budget process we are going through.
Mr. HiGGlNS. It also emphasizes the need for the front-end con-
trols that are lacking in this case.
Senator NuNN. OK. Mr. Higgins, I have interrupted you. Go
ahead and finish.
Mr. Higgins. The audit did, however, produce significant results.
It found that lADE's improper administration of the ability-to-ben-
efit provision cost the American taxpayer at least $1.3 million in
just a 2-year period. The clock-to-credit hour conversion cost the
taxpayer an additional $2.8 million for the same time period.
Since conducting lADE activities, we have made management
and procedural changes to adjust to difficulties encountered there.
Details of these changes have been provided to the Subcommittee
in my written statement. I have also provided the Subcommittee in
my written statement descriptions of significant investigative cases
we have worked since the lADE investigation.
We are convinced, however, that because the Department must
rely so heavily on the integrity of the participant organizations and
agencies, improving the control of the Pell program will remain dif-
ficult. Further, protecting this program from those who, through
collusion, abuse the program for personal financial gain will remain
problematic unless fundamental changes such as those that I have
discussed previously are implemented.
Senator Nunn. Even if we make all those changes, do you think
we are going to be able to get this program under control?
Mr. Higgins. It will get better. I don't know if it is cost-effective
to put in the controls and the people necessary to make it air-tight.
Senator NuNN. At some point, you get diminishing returns?
Mr. Higgins. Right.
Senator NUNN. Right now, you have got a program that you are
saying is not working correctly.
Mr. Higgins. Correct.
Senator Nunn. It is not being properly managed now?
Mr. Higgins. Well, I am saying the regulations — there is a need
to implement the regulations, and also there is some legislative
Senator Nunn. You need a change in law?
Mr. Higgins. Yes.
Senator Nunn. You need a change in regulations?
48
Mr. HiGGlNS. And the enforcement of the regulations.
Senator NUNN. And you need a change in enforcement?
Mr. HiGGlNS. Yes.
Senator NuNN. And you need more personnel?
Mr. HiGGINS. Yes.
Senator Nunn. Is this program something that ought to be
saved, or is it going to be a continued rip-off from now on? I am
asking your personal opinion.
Mr. HiGGlNS. I think it has had a lot of fine results. I think there
are a lot of people who got an education who otherwise would not
have gotten educations.
Senator NuNN. We just have to accept the rip-offs to some ex-
tent?
Mr. HiGGiNS. I don't know if we want to accept it or make it
more at a level that we can be comfortable with. It doesn't make
sense to pay $84,000 for a license to cut hair.
Senator NUNN. At some point, when you have got schools out
there that have a profit motive, the more Pell Grants they get, the
more money they make. They are in the business to make money,
and without the right enforcement you have got no way to regulate
that. It is an open purse.
But the other thing that bothers me is if you basically allow
them to train 2,000 cosmetologists or 2,000 truck drivers when in
that particular region there is only a need for 100, then that is a
colossal rip-off in itself even if the training is good.
Mr. HiGGlNS. I agree, and we have reported on that issue, actu-
ally.
Senator NuNN. But then on the other hand, how do we manage
that? I mean, you have got Government money doing that. Without
Government money, the market would never dictate that. The mar-
ket would never dictate that, so the Government is distorting the
market by putting the money in it.
On the other hand, how do you regulate that? Are we going to
have some central bureau in the Department of Education that
starts making economic analysis as to how many jobs are needed
and as to what kind? I mean, that gets the Government into a
management of markets that is almost — the cure might be as bad
as the disease. What do we do about this?
Mr. LONGANECKER. If I might comment on that. Senator, I think
some of the proposals and some of the ideas currently being dis-
cussed in the education and training initiatives, both from the ad-
ministration and within the Congress at the present time, try to
address that.
The Federal Government doesn't do a particularly good job of
manpower planning. Local areas generally do have a fairly good
sense of what the local labor market can handle and deal with, and
we may need to put in, particularly in shorter-term vocational pro-
grams, a stronger requirement for job placement. Placement is a
very good proxy for job demands. I mean, if you get placement,
there obviously were jobs. So we have placement requirements in
our very short-term programs.
Senator NuNN. Why couldn't placement be a big factor in wheth-
er the schools get continued eligibility? Why should a school that
is not able to place people in jobs for which they were trained — not
49
able to place a certain percentage of them — be graded on that and
if they don't get their placement up to a certain standard be de-
clared ineligible, period? I mean, that is letting the market work
rather than the Government trjdng to decide how many of any par-
ticular job we have.
Mr. HiGGiNS. That was one of the standards I was talking about
when I was talking about the accrediting agencies have not done
anything with regard to standards.
Senator NUNN. Do they have that authority already?
Mr. HiGGINS. Yes. It is my understanding that it is their respon-
sibility under the 1992 amendments to develop standards. Now,
there is a difference of opinion, I believe, on what we should do
with the standards. I am very enforcement-minded and I think the
accrediting agencies should be held accountable to those standards
and only accredit schools that will meet those standards and con-
tinue to meet those standards.
Senator NuNN. Mr. Higgins, you heard the lADE case today.
What was your reaction to that, and what steps do you think your
office ought to take to address the problems?
Mr. Higgins. Well, we have taken several actions. We have re-
placed the head of the Office of Investigation. Prior to that, we
knew that there was a need for the change. We made a change. It
just so happens that that change was occurring right within a
month of this particular case closing.
We have changed the way we are doing business. We are doing
skills assessments with our employees. We had a wake-up call,
talked about due professional care. We have developed special
training courses down at the Federal Law Enforcement Training
Center in Brunswick, Georgia. We have taken a lot of steps, in my
estimation, to correct the problem.
Senator NuNN. But you are here telling us that you don't have
enough manpower now to do your job and it is being cut. So you
are, in effect, saying you are not going to be able to do your job
in this area, right, to supervise this and to investigate?
Mr. Higgins. I don't think we would ever be able to handle with
our current staff level the number of complaints that come in the
door.
Senator NuNN. So Congress has got to decide whether to give you
enough manpower or just let the rip-offs continue. Is that what you
are saying?
Mr. Higgins. Yes, sir.
Senator NuNN. Ms. Blanchette, I will call on you now. Am I pro-
nouncing it correctly?
Ms. Blanchette. That is correct.
Senator NuNN. OK.
50
TESTIMO^fY OF CORNELIA BLANCHETTE,i ASSOCIATE DIREC-
TOR, EDUCATION AND EMPLOYMENT ISSUES, HEALTH, EDU-
CATION, AND HUMAN SERVICES DIVISION, U.S. GENERAL
ACCOUNTING OFFICE; ACCOMPANIED BY JOSEPH J. EGLIN,
ASSISTANT DIRECTOR, HEALTH, EDUCATION, AND HUMAN
SERVICES DIVISION
Ms. Blanchette. Mr. Chairman, today I am accompanied by Jay
Eglin, who is one of our assistant directors and directs most of our
higher education work.
Senator NUNN. I should introduce you as being the Associate Di-
rector of Education and Employment Issues, Health, Education,
and Human Services Division, General Accounting Office.
Ms. Blanchette. Thank you. I have a longer statement which
I will submit for the record, and at this time, with your permission,
I will summarize that statement.
Senator Nunn. Good. Without objection, all of your statement
will be in the record.
Ms. Blanchette. I am pleased to be here today to discuss the
two largest Federal programs that provide financial aid to post-
secondary students, the U.S. Department of Education's Federal
Family Education Loan Program and its Federal Pell Grant Pro-
fram. In academic year 1994, these two programs provided over
26 billion in loans and grants to over 10 million students.
Because of the Subcommittee's continuing concern about abuses
in Federal student financial aid programs, you asked us to deter-
mine the extent to which the Department effectively uses its stu-
dent aid data to ensure compliance with Federal requirements and
prevent the reoccurrence of abuses, and to assess the improve-
ments that the Department plans or has made to its systems for
identifying abuses in its loan and grant programs. Our report on
the results of our work is being released today. My statement is
based on that report. First, I will talk about the Department's use
of its FFELP and Pell Grant data, then I will discuss improvement
efforts.
Although the Department has, in general, done a good job of pro-
viding grants and loans to eligible students, it has been less effec-
tive in using available student aid data to ensure compliance with
Federal requirements. For example, for fiscal years 1982 through
1992, Department data indicate that 43,000 ineligible students
may have received 58,000 loans totaling over $138 million.
For the 5-year period ending in award year 1993, more than
48,000 students may have received Pell Grant overpayments. Fur-
ther, although FFELP loan defaults have decreased in the past 2
years, the Federal Government paid out over $2.4 billion in fiscal
year 1994 to make good its guarantee on defaulted student loans.
The Department's data showed thousands of recurrences of Fed-
eral aid abuses that may have been prevented if schools, which are
responsible for verifying student eligibility for financial aid under
both the FFELP and Pell Grant programs, had available at the
time of their determinations data we found in the Department's
records.
'The prepared statement of Ms. Blanchette appears on page 139.
51
As an example of the specific situations the Department's data
revealed, one student defaulted on a loan in May 1992, making the
student ineligible for additional student financial aid. According to
Department data, however, the student received five additional
loans, one in February 1993, two in July 1993, and two in Septem-
ber 1993. Also, according to the data, as of September 30, 1992, of
the 43,000 students who were ineligible for additional loans, 20,000
had defaulted on 23,000 loans made to them after they had become
ineligible. The amount of principal and interest outstanding on
these defaulted loans as of September 30, 1992, was over $56 mil-
lion.
The Department's data also identified over 100,000 students
who, subsequent to having defaulted on a student loan, thereby
making them ineligible for any Federal student financial assist-
ance, may have received 139,000 Pell Grants, totaling approxi-
mately $200 million. Of these inehgible students, 74,000 may have
received one grant, 20,000 two grants, and 7,000 three or more
grants.
In addition, the Department's data showed that students may
have received loans that exceeded their cost of attendance. Pell
Grants from two or more schools for the same enrollment period,
and multiple Pell Grants that, in total, exceeded the statutory
limit. All of these
Senator NUNN. Could you go back over the number of ineligible
students and the amount of money, and could you give me the time
frame for that?
Ms. Blanchette. All right. Our examination covered fiscal years
1982 through 1992, and the Department's data revealed to us
through our examination 43,000 ineligible students may have re-
ceived 58,000 loans totaling over $138 million. With regard to Pell
Grants, 48,000 students had received overpa3anents.
Senator NuNN. That is in a 10-year period?
Ms. Blanchette. That is in a 10-year period for students receiv-
ing loans, correct. We also used the Department's data to identify
a number of students who were ineligible who had received loans
and grants, and had subsequently defaulted on their loans, or re-
ceived Pell Grants after having defaulted on student loans. The
prohibition is against getting further Federal financial aid if you
are in default on a loan.
In addition, the Department's data showed that students may
have received loans that exceeded their cost of attendance, Pell
Grants from two or more schools for the same enrollment period,
and multiple Pell Grants that, in total, exceeded the statutory lim-
its. All of these are prohibited practices that schools are responsible
for preventing.
The data showed that loans for 2,000 students exceeded cost of
attendance by a total of $2.4 million. However, the total instances
may have exceeded this because for about a quarter of the data in
the system, there was no cost of attendance information. According
to the Department's data, during award years 1989 through 1993,
over 35,000 students may have received Pell Grants from two or
more schools in the same month and year. Department data also
showed that 48,000 students attending two or more schools may
have received multiple Pell Grants that, in total, exceeded the stat-
52
utory limit. For example, in award year 1993, one student received
grant funds totaling $5,640, when the statutory limit was $2,400.
We realize that these numbers of students and amounts of dol-
lars are only a small percentage of the total number of students
who have received loans and grants and the total dollar amount of
Federal student financial aid. Nevertheless, we believe our findings
are significant because they indicate that the Federal Government
could lose large sums of money through erroneous payments to stu-
dents, some of whom are ineligible for any Federal financial aid.
Because of situations like the ones I have mentioned, the Depart-
ment has initiated improvements in its student loan and grant sys-
tems and program management. These include developing new sys-
tems, making organizational changes, and strengthening program
reviews at schools. The Department data that I have referred to
thus far came from the FFELP database and/or the Pell Grant Re-
cipient and Financial Management System.
The FFELP database was a consolidation of loan data that the
Department collected from guaranty agencies annually. The Pell
Grant Recipient and Financial Management System is a consolida-
tion of grant data from schools. The FFELP database had limited
usefulness in preventing abuses because the data were not pro-
vided to the Department until after loans were awarded, sometimes
as long as a year afterwards.
In November 1994, the National Student Loan Data System re-
placed the FFELP database. NSLDS is to be implemented in three
phases. It is designed to provide schools on-line access to student
loan data and is to be updated monthly. Starting in the fall of
1995, NSLDS, as part of phase II of its implementation, will con-
tain Pell Grant data that will be updated weekly. While NSLDS
looks promising, it is too early to determine its effectiveness in en-
suring compliance with Federal requirements.
In addition to bringing NSLDS on line, the Department has also
made some recent organizational changes to improve the manage-
ment of its student financial aid programs. When we began our
work, there was a lack of full accountability for the effectiveness
of these programs because of divided organizational responsibil-
ities. Most notably, there was no unit responsible for overseeing all
aspects of the Pell Grant program. Although we have not thor-
oughly evaluated recent changes, they appear to provide a better
organizational framework for program oversight and accountability.
In part, as a result of this Subcommittee's October 1993 hearings
and recommendations in the 1993 Office of Inspector General audit
report, the Department revised and expanded its criteria for select-
ing schools for program reviews. In addition, there is now more col-
laboration between the Department's office that is responsible for
monitoring schools and the OIG to help prevent wasted resources
through simultaneous uncoordinated and multiple visits to schools.
Again, it is too soon for us to assess the effectiveness of these ef-
forts in strengthening program reviews.
In conclusion, the vast majority of student financial aid appears
to have been awarded in accordance with Federal requirements,
but in some instances the Department has not fully used the data
in its systems to ensure compliance. While we recognize that the
Department relies extensively on schools to determine students' eli-
53
gibility for Federal financial aid and to ensure that other require-
ments are met, we believe that the Department must improve the
use of its data to support schools in their compliance assurance
role.
A number of improvement efforts have become operational since
we used the Department's data to identify the abuses I have talked
about this morning. Although, as I have said, it is too soon to as-
sess the effectiveness of these efforts, we commend the Department
for moving in the right direction.
Mr. Chairman, this concludes my statement. I will be glad to an-
swer any further questions.
Senator NuNN. Ms. Blanchette, you state that the National Stu-
dent Loan Data System will be updated monthly in the case of stu-
dent loan data and weekly in the case of Pell Grant data. Is there
any indication that the Department has the capability to routinely
review this information to uncover the kinds of payments to ineli-
gible recipients that you describe?
Ms. Blanchette. Of course, the Department certainly has great-
er capabilities than we have in this regard. We were able to do it
with the help of our computer programmers. We had the disadvan-
tage of having to learn the systems, the layouts of the records, and
so forth, but we were able to develop computer programs that al-
lowed us to examine the data in the Department's records.
Senator NuNN. You are saying they could do it if they had the
desire to do it?
Ms. Blanchette. They could do it, yes.
Senator NuNN. Do they need additional people to do it?
Ms. Blanchette. Well, we didn't look at their personnel in terms
of their ability to accomplish the workload. I really can't comment
on that.
Senator NuNN. Do you believe they are developing the systems
that would allow them to do this?
Ms. Blanchette. They are heading in the right direction. We did
not evaluate the new NSLDS, but from what we have been told
and what we know of how it is intended to operate, it looks like
it will be a big improvement. One of the problems is that the infor-
mation that is available to schools in terms of defaults and prior
abuses is not necessarily available to the schools under the current
system, and under NSLDS. There is some delay, a month in the
case of loans and a week in the case of Pell Grants.
There is not real-time information available to, in all or some in-
stances, prevent the awarding of additional financial aid. But there
certainly is information available to detect patterns in schools that
repeatedly award aid to ineligible students and, in that way, pre-
vent recurrences.
Senator NuNN. You also stated that NSLDS is being imple-
mented in three phases. It appears that Phases II and III will in-
clude information in the database that will assist in preventing
payments to ineligible recipients. Do you feel confident the Depart-
ment can adequately review and use this data to lower the amount
of ineligible outlays?
Ms. Blanchette. Well, as I said, we have not evaluated the new
system. It just became operational in November of 1994. The Pell
54
Grant data will not be added until this fall, and then the remain-
der of the
Senator NuNN. So you really haven't done that kind of evaluation
that would allow you to answer that question?
Ms. Blanchette. That is correct.
Senator NuNN. Have you looked at the capacity of the Depart-
ment to handle direct loans?
Ms. Blanchette. We have in general terms. We have not done
a detailed evaluation of their implementation of direct lending, but
we certainly are aware
Senator NuNN. What are your personal observations about
whether the Department is now prepared to go into the direct lend-
ing business?
Ms. Blanchette. Well, this is the second year of direct lending
and so far things seem to be going well. The reaction of schools
that participated in year one was generally favorable. They did a
lot of planning, certainly, in year one to begin implementation, and
I guess the real test is when the number of schools increases more
and more. Now, this year more schools are coming on line.
Senator NuNN. Have they gone into proprietary schools now?
Ms. Blanchette. Yes, there are proprietary schools included
among the schools involved.
Senator NUNN. Mr. Longanecker, is there any selectivity on the
proprietary schools that are in direct lending? Are these your most
reliable schools with the lowest default rate, or how are you going
about that?
Mr. Longanecker. In the first 2 years, the criteria did limit the
eligibility, but as the program goes into full effect, the criteria for
eligibility is, by law, the same as it is today.
Senator Nunn. It is going to be as broad as the Pell Grant pro-
gram is?
Mr. Longanecker. As broad as the current FFEL program is,
the current student loan program.
Senator NuNN. Do you approach that with fear and trepidation?
Mr. Longanecker. Actually, you know, I think this system is de-
signed in such a way that it will give us more management control,
substantially more management control than the existing program.
Just to give you an idea, there was a case that they mentioned
about the student who had four Pell Grants during a period of time
after they had defaulted on a loan. If you did the chronology on
that, you would find that, actually, there was no way we would
have known that person had defaulted until after all of those Pells
had occurred because of the length of time it used to take to rec-
oncile an account before we ever found out about it.
However, in this program, we know when a student is delinquent
on their loans right now, and so we can work that into the system,
and we have designed our systems so they interface with our other
systems. So, in fact, direct lending gives us much more manage-
ment capability than the existing FFEL program. We are very con-
fident we can do it within existing resources.
Senator NuNN. Mr. Higgins, do you share that confidence that
the Department is going to be able to manage the direct lending
program based on what you know of the Pell Grant program and
what you know of the direct student loan program and what you
55
know of your personnel situation in the IG office? I am asking your
personal view now, not the Department?
Mr. HiGGlNS. Well, definitely, this system is improved over the
old system. It is a lot less complicated. The Department has given
the direct loan people priority hiring, so they are hiring people in
that area. We think that if they continue to take it one step at a
time and to monitor it closely, it could become very effective.
Senator NUNN. What is the danger here? If you pointed out two
or three dangers, what would be the dangers?
Mr. HiGGiNS. Moving too fast without the controls in place. We
also think it is very important that the gatekeeping process which
I spoke to before that is going to keep out the bad players — that
is also important.
Senator NuNN. Does the law now permit moving at the kind of
pace that would make sure the management systems are in place
before you move too rapidly, or is the current course too rapid, in
your personal view?
Mr. HiGGlNS. I really don't have a view on that. I don't really
know enough about it.
Senator NuNN. Has your office gotten involved in doing any IG
checks on the direct lending yet?
Mr. HiGGlNS. Yes, we are very involved in it.
Senator NuNN. What have you found so far?
Mr. HiGGINS. Well, there is currently a problem in the cash rec-
onciliation area, but they are devoting a lot of time and effort to
resolve those problems.
Senator NuNN. Is that the main problem you have found?
Mr. HiGGlNS. Right now, yes.
Senator NUNN. What do you mean, cash reconciliation? I mean,
that term is broad enough to cover everything we have ever uncov-
ered here, isn't it? [Laughter.]
What happened to the cash? Is that what you are talking about?
Mr. HiGGINS. Well, actually, accounting for it by individual is
where the problem is. We can account for it in summary. We can't
account for it by individual. Isn't that correct?
Mr. WURTZ. Mr. Chairman, if I may speak to that, the problem
is an accounting issue. The individuals that are having the problem
are the schools and making sure that they provide the data to our
contractor on time so that we can actually, individual by individ-
ual, tie in with the cash amount received, and we are doing that
by having reconciliations monthly on this.
Some of the bigger schools that use mainframe systems have had
difficulty in making the conversion. Actually, the schools that are
doing a better job at the present time are those schools where the
Department has provided the software for PC operation of the pro-
gram, and those are able to take it and make easier reconciliations.
We are working with the bigger schools on their main frames and
helping them to manage this problem. We have people in the field
working with it. We have contractors working with it, but we don't
see it as a problem of fraud or abuse or anything of this nature.
It is a bookkeeping problem at this point in time.
Let me go back for a moment to your earlier question regarding
the systems here because one of the problems in managing this
56
program from the very beginning has been the lack of adequate
data.
Senator NUNN. Which program, the existing or the direct?
Mr. WuRTZ. The existing program, the FFEL program, the guar-
antee program, the Pell program. All of that was the lack of having
good, accurate data on a timely basis. For example, in the GAO re-
port you look at that and you have got a time frame under that
system in which, based on the information we would get under the
old data dump from the guarantee agencies, there is no way within
IV2 or 2 years that the department would know the student had
defaulted under that system.
With the direct loan system, you are going to know immediately
because we are handling those loans. So we know when a student
is behind not just at the default stage, but when they have missed
a payment, so we know exactly what is occurring, at what time,
and we can prevent that student from getting a future loan imme-
diately or getting a Pell Grant immediately. That system is almost
fully loaded. We are loading all of the information from the lenders
this summer. Then we will load the Pell Grant information on this
fall and we will have a total system.
This is the largest character-based data system in the country
today, so it is an incredible system that we are dealing with, very
effective. What it does is gives us information with which to man-
age, and that is critically important in being able to prevent even
things like what happened in the case of lADE by having informa-
tion currently on time and that is accurate.
Senator NuNN. You have had a lot of problem in the past,
though, managing these accrediting agencies, dealing with the
States, getting information from the big agencies out there that are
managing at a regional level, coordinating your own staff. Now, you
are basically going to handle literally millions of loans directly and
you believe you are going to have the systems to do it?
Mr. WuRTZ. There is a real difference there. Here, we have con-
trol. There, we were essentially relying on others, particularly with
the information we received from the guarantee agencies and the
lenders in the student loan program.
I think that Jack made an extremely important point, though.
You know, our data systems are going to be extremely important
to us, but the way we manage this program still is only going to
be as good as the institutions that we let into the program or that
we keep doing honest work in the program, and so the gate-
keeping
Senator NuNN. You had better take it step by step.
Mr. WuRTZ. The gatekeeping is something that we have got to
make sure is working.
Senator Nunn. Are you going to be willing as a policy matter. Dr.
Longanecker, to come over to Congress and say, look, this program
can work, but it is going too fast, don't push us? Are you going to
be able to do that? Will you be willing to do that?
Mr. Longanecker. If that is the case, we would do that because
it is very important to the President that this be a successful pro-
gram. If the President wants it to be a successful program, it will
only be successful if we bring it up well. The fact is we have
57
brought it up well. This program is a model program. We have put
our best
Senator Nunn. You haven't opened it up to all the proprietary
schools yet, though, have you?
Mr. LONGANECKER. No. We will, logically, next year, but they
have to come through; they have to pass all the other tests. I think
when we put together the things the 1992 amendments gave us in
our toughened management on the gatekeeping— I mean, more of
these institutions are going to be in provisional certification and if
we have got problems, we are going to get them out of there, and
I think the evidence suggests we are already doing that.
A lot of bad institutions are exiting these programs, and the de-
fault rate initiative helped us a great deal in that regard. Once the
appeals on the 300 institutions that are still in appeal are resolved,
many of them will be gone, as well. So this system is self-cleansing
itself a bit and we are helping in that cleansing process, and we
are committed to continuing to make it a better overall system.
Senator Nunn. I hope you are right, and we will be pulling for
you. I just have to say I have sat in this position through the late
1970's and early 1980's. I have had hearings with the Department
of Education, your predecessors coming up, and everything has
been said, and your reassurances today I have heard everybody
make before.
Then we throw a dart at the board, go out and investigate just
about any school— you don't have to be very careful with it, you
don't have to get an inside tip — and, bang, you find a huge scandal.
Maybe these are aberrations, but I have seen enough aberrations.
I think there is a real pattern here.
Mr. LONGANECKER. Well, Senator, I think I am the first one ever
to come back to talk to you, and that is partly because I have
lasted longer than most of my predecessors.
Senator Nunn. Yes. Why is that? [Laughter.]
Mr. LONGANECKER. Well, I told you before it is probably because
I couldn't get a job. I am pretty sure of that now. You know, in my
kind of job you don't make a lot of fi-iends, and so I don't think
there are a whole lot of other opportunities out there for me.
I do expect to be able to come back and talk to you in a couple
of years and continue to show you trends like this, and to be able
to also demonstrate to you, to give you examples like lADE where
we have found fi-aud. I mean, in our testimony we identified some
areas where we are working together. I don't think the Inspector
General's office, the Office of General Counsel, the Office of Post-
secondary Education, and the CFO's office have ever worked as
closely together as we are today. I mean, we are intentionally forc-
ing ourselves.
Senator Nunn. But you have heard Mr. Higgins say he can't do
his job because he doesn't have enough personnel. He doesn't have
enough now and he is going to get cut. Now, if you don't have the
IG with enough people doing it, how in the world are you going to
handle it? ^ » &
Mr. Higgins. Senator, I think the cut that I am talking about
happened right up here on this Hill.
Senator NuNN. I understand that, I understand that.
92-498 96-3
58
Mr. HiGGlNS. The Department has been very supportive of us as
far as our budget request to 0MB. They have treated us very well.
Mr. WURTZ. This is certainly an area where we would support —
as has been mentioned several times, people keep calhng this an
honor system, and I would remind the Senator that our tax system
is an honor system and the only thing that keeps it honest is to
have an adequate audit follow-up where you actually penalize the
people that get caught.
Senator NUNN. We have got a $200 billion deficit, too, that has
been going on for a long time.
Mr. WuRTZ. Absolutely, and we have to be able to deal with that,
and therefore we have to catch them. But the cost of trying to put
a system in place that would be different from our dependence on
the outside auditors, from the schools doing their job— the cost of
putting a system in place to do that would be far more than what
we are dealing with today.
Senator NUNN. Mr. Longanecker, your career staff was quite con-
cerned over your reversal of their decision to begin conducting pro-
gram reviews on an unannounced basis. Everj^hing I know about
investigative techniques tells me, whether it is IRS or anj^hing
else, you have to have unannounced kinds of inspections. Why have
you reversed that?
Mr. Longanecker. Two reasons. We still do unannounced visits
whenever we have a reason to suspect that we need to do an unan-
nounced visit. We don't, however, do all of our reviews unan-
nounced any longer, and there are two good reasons. It just from
our perspective, didn't make sense. It costs us a great deal of staff
time when we show up on a campus and the people we need to talk
to aren't there because they had no idea that we were coming in.
If we have no reason to believe fraud and abuse and if we are
looking for mismanagement — and mostly, that is what we are find-
ing in our initial reviews — we can look at those files and it doesn't
hurt to have told the schools that we were coming in advance so
that they can be prepared to share, so that they can even pull the
files and we can give them the instructions. It saves us a great deal
of time and efficiency.
Senator NUNN. You are doing that for all schools, though, even
those that have high default rates, even for the proprietary
schools?
Mr. Longanecker. No. If we have reason to believe that there
might be a problem beyond the ordinary
Senator NuNN. At the particular school or in the category?
Mr. Longanecker. At that school, at that individual institution.
Senator NUNN. Well, our experience is you can take this propri-
etary area and throw a dart and you have got a problem.
Mr. Longanecker. That is not my experience, and I have
worked in this area for a long time. I was the overseer in two
States of the private occupational groups that looked at these insti-
tutions, and I worked with an awful lot of proprietary schools in
both Colorado and Minnesota and I
Senator NuNN. But your default rates belie that and your place-
ment rates belie that in a lot of areas.
Mr. Longanecker. Let me see if I can find a way to say this.
A disproportionate share of our problems, without doubt, is in the
59
proprietary sector, particularly the short-term programs in the pro-
prietary sector, but most institutions in that sector are not bad ac-
tors. So, yes, most of the bad ones are in the proprietary sector, but
there are still very legitimate providers of service in there and you
could make that determination.
Senator NUNN. Well, "most" would be 51 percent.
Mr. LONGANECKER. Yes.
Senator Nunn. Now, are you talking 95 percent or are you talk-
ing 51 percent?
Mr. LONGANECKER. No, I am not talking 95. I couldn't give you
the percentages, but I tell you, with the things that we have got —
high default rates — we are going to go in and check that institution
out pretty closely. If we have indications that there is the potential
for fraud, we are going to go in with an unannounced visit. But
when we are doing a review of Chicago State University, for exam-
ple, we are probably going to tell them we are coming in, unless
we have reason to believe there is fraud occurring.
Senator Nunn. Well, I agree. I think you ought to have certain
high-risk categories, though, where you go on unannounced visits.
My understanding is you basically terminated anything other than
a particular school that you have reason to suspect. That is a lot
different than saying, okay, we have got these whole categories out
there, the major universities, and we don't need to do it, but we
do need to do it in these short-term proprietary schools. I mean,
when you eliminate that whole category from unannounced inspec-
tions, you are relying almost exclusively on
Mr. LONGANECKER. That is not what we did. What we said is
that we were going to do announced visits unless we had reason
to do an unannounced visit.
Senator NUNN. But my contention is you have got reason to do
unannounced visits in this whole area called short-term proprietary
schools.
Mr. LONGANECKER. Well, we have proposed to you a general ap-
proach that would allow us to make much more significant dis-
criminations by type of institution. That is part of our proposal
that is before you.
Senator NuNN. Well, does it include this unannounced visit? I
mean, you didn't go into any detail today about how you are going
to administer this area once you separate them out. I assume that
will be forthcoming.
Mr. LONGANECKER. I would not categorize, I think, within that
category. I also said that we ought to differentiate by performance,
and the best performing proprietary schools ought not be faced
with the same broad brush of disrespect and distrust.
Senator NUNN. I don't disagree with that. Where I disagree,
though, is saying you have to have one school that has one particu-
lar problem before you do an unannounced visit. I do not think that
that is the way you have the proper enforcement or the proper in-
vestigative techniques. When you have got whole categories out
there — it may be 60 schools with high default rates — why shouldn't
you have anybody with a high default rate be subject to an unan-
nounced visit?
Mr. LONGANECKER. Well, that is one of the criteria we use to de-
termine an unannounced site visit.
60
Senator NUNN. Yes, but you are doing it case by case.
Mr. Higgins, where do you come down on this?
Mr. Higgins. As far as unannounced visits?
Senator NUNN. Yes.
Mr. Higgins. We announce our visits when we do an audit. We
don't do it when we do an investigation.
Senator Nunn. You don't do it when?
Mr. Higgins. When we are conducting an investigation.
Senator NuNN. You don't feel bound to not have unannounced
visits? You do do unannounced visits?
Mr. Higgins. Yes, sir.
Senator NuNN. Well, how does that fit into the policy here?
Mr. Higgins. I think we have
Senator NuNN. You have been permitted to continue that, then.
Mr. LONGANECKER. Well, we are permitted to continue that. Our
policy still has unannounced site visits. It is just not every visit is
an unannounced visit.
Senator Nunn. You have got some staff that you are relying on
that you have described as good, honorable people who are very
frustrated because of changes being made.
Mr. LONGANECKER. Yes. I think they made a bad decision. I
made it very clear to them that I thought that was a bad decision,
and they disagreed with me. I will probably make other decisions
over the next 6 years that they won't like. I wouldn't be at all sur-
prised with that. But I would tell you I am going to make the deci-
sions that I think are best for the program overall and that will
provide integrity to the program and still balance and respect the
people with whom we are dealing.
Senator NuNN. Can you assure us that there is not going to be
any retaliation against the employees who have been frank and
candid in giving their views and opinions to the staff, even though
you may disagree with them?
Mr. LONGANECKER. Certainly.
Senator Nunn. Mr. Higgins, I am still trying to understand what
you think about this question of unannounced visits, whether it
ought to be a policy to do that or whether it ought not be.
Mr. Higgins. Generally, when we do a criminal investigation, we
do not announce that we are coming. When we do an inspection,
we normally do not announce that we are coming. When we do an
audit, we do give them prior notice.
Senator Nunn. You are saying "we." You mean the IG depart-
ment?
Mr. Higgins. Yes, sir.
Senator NuNN. Well, what about the other part of enforcement?
Do you think on inspections they ought to have the same procedure
you have; that is, not to have announced visits on inspections?
Mr. Higgins. I think they could do it both ways. I don't think
some schools would merit an unannounced visit. Some schools
would.
Senator NUNN. But wouldn't there be categories that you ought
to basically reserve the right to have unannounced visits?
Mr. Higgins. Yes, sir.
Mr. LONGANECKER. I don't think we are talking differently. We
have reserved the right to have an unannounced visit of any school.
61
Senator NUNN. I am hearing different things from your staff and
what you
Mr. LONGANECKER. My staff isn't teUing you what the poUcy is,
then. I can tell you that categorically.
Senator Nunn. Well, tell me what the policy is, then.
Mr. LONGANECKER. The policy is that we reserve the right to
make any visit an unannounced site visit, but that is not the norm.
The norm is that we have announced site visits unless we have
reason to believe that there needs to be an unannounced site visit,
in which case we will do an unannounced site visit.
Senator NUNN. How far up the line does that approval have to
go? Do you have to sign off on any unannounced visit?
Mr. LONGANECKER. No.
Senator NUNN. Who has the authority to do it?
Mr. LONGANECKER. I actually believe that the program review
staff have the authority in the regions to determine that. I am not
quite sure exactly where that — it certainly doesn't come to me. I
have never asked for that level of authority.
Senator Nunn. Well, what kind of proof do they have to have be-
fore they can justify going in for an unannounced visit?
Mr. LONGANECKER. They have to make a reasoned judgment, and
I expect my staff to do that.
Senator NUNN. How many unannounced visits did you have in
1994? I am not talking about the IG; I am talking about the other
departments.
Mr. LONGANECKER. I don't know the answer to that.
Senator NuNN. Can you furnish that for the record?
Mr. LONGANECKER. Yes.
Senator Nunn. And compare it to the previous years?
Mr. LONGANECKER. Sure. Well, in 1994, we will have quite a few
because the policy essentially went into effect in 1994.
Senator NuNN. Well, you can trace it with the first 6 months of
this year. I would like a comparative.
Mr. LONGANECKER. Yes, we will do that.
Senator NuNN. I would also like to know the level of proof that
the staff has to have in order to, or level of suspicion
Mr. LONGANECKER. I will be glad to provide that and give you
a sense of
Senator NuNN. And who has the authority, if you could clarify
all of that for the record.
Mr. LONGANECKER. You bet, yes.i
Senator NUNN. Do any of you have any other comments you
would like to make? We are going to have to break up here.
Mr. LONGANECKER. The only thing I would say is I think we are
on the same team here. This isn't always a lot of fun to come up
and have these discussions, but we have learned a lot out of this
process and these discussions. We are going to do the best job we
can to make you proud of these programs and to make you proud
of our management of these programs. We started from a very sub-
stantial deficit a couple of years ago and we think we have made
a lot of progress. We are going to keep trying, and hopefully that
will be more and more evident to you over time.
' See Exhibit #39, page 199.
62
Senator NUNN. Well, we look forward to having you come back
and give us some, hopefully, examples of how this, particularly in
the Pell Grant area, is working. I also would like to get some feed-
back from you on how we get the student or beneficiary in the loop.
Mr. LONGANECKER. We will do that.
Senator NuNN. Mr. Higgins, do you have an3^hing else?
Mr. Higgins. No, sir.
Senator Nunn. Ms. Blanchette?
Ms. Blanchette. No, sir.
Senator NuNN. We thank you all for being here.
I will make one other announcement. I have received a statement
from Congressman Bart Gordon of Tennessee on the general sub-
ject matter of this hearing. I would note that Congressman Gordon
has been very active in Congress' attempt to address many of the
systemic problems in Title IV programs. He has introduced legisla-
tion directed at remedying the abuses, and we will have his state-
ment as part of the record and available to the media. ^
Senator NuNN. The record in this case will remain open for 30
days, within which time parties and individuals are invited to sub-
mit statements for inclusion in the record.
Thank you.
[Whereupon, at 12:57 p.m., the Subcommittee was adjourned.]
See Exhibit #1, page 145.
APPENDIX
STAFF STATEMENT
Introduction
Mr. Chairman and Members of the Subcommittee, for the past 5 years now the
Staff has been reporting to the Subcommittee on its investigation of problems with
the management and oversight of federal student financial aid programs. This in-
vestigation began with an examination of the guaranteed student loan program.
That examination led to a series of hearings beginning in 1990, and culminated in
the issuance of a 1991 Subcommittee report which set forth what the Subcommittee
termed "overwhelming evidence that the Guaranteed Student Loan Program, par-
ticularly as it relates to proprietary schools, is riddled with fraud, waste, and abuse,
and is plagued by substantial mismanagement and incompetence."
The Subcommittee's report contained over twenty-five separate recommendations
for reform of the loan program. Many of those recommendations were ultimately in-
corporated into amendments to the Higher Education Act which were passed by the
Congress and signed into law by President Bush in 1992. The amendments were de-
signed, among other things, to tighten institutional eligibility and to strengthen the
"triad" of State licensure, independent accreditation, and federal certification.
Subsequent to the passage of these amendments, the Staff undertook an examina-
tion of the Federal Pell Grant Program. With over $6 billion awarded annually, the
Pell Grant Program is the largest direct federal student aid program. The Staffs
examination led to hearings in 1993, which revealed that the Pell Grant program
was beset by many of the same systemic weaknesses that plagued the student loan
program. In particular, the hearings focused on the failure of the Department of
Education's gatekeeping and program review procedures to prevent or detect fraud
and abuse. These failures were of particular concern to the Staff with respect to the
Pell Grant program because, apart from strong and continuous oversight, the Pell
Grant program does not contain any structural indicators to alert one to the possi-
bility of ongoing abuse by program participants. Indeed, as the Department's Inspec-
tor General put it during the hearings, "the Pell Grant program is by its very design
vulnerable to fraud and abuse" because it "operates essentially on an 'honor sys-
tem'."
The Subcommittee's 1993 hearings concentrated on a number of avocational reli-
gious studies schools which managed to gain participation in the Pell Grant pro-
gram despite their failure to meet normal State licensure and accreditation require-
ments and the definitional requirements of the Higher Education Act. Once in the
program, these schools obtained tens of millions of dollars of federal monies by,
among other devices, artificially inflating tuition and drawing down Pell funds for
ghost students and otherwise ineligible individuals.
At the same time, the Staff noted during the hearings that the Department's In-
spector General had cited a number of proprietary trade schools in the previous few
years for similar abuses which also involved tens of millions of dollars. On the basis
of this information the Staff conducted a closer examination of Pell Grant abuse
within the proprietary trade school sector. The Staff was further spurred in this re-
gard by a concern that as the 1992 Higher Education Act amendments succeeded
in tightening program requirements in the student loan area, some problem schools
might drift away from the loan program and into the Pell program.
Indeed, a review of the Department's data seems to bear out this pattern. From
1983 to 1992, 95 schools left the student loan program (either voluntarily or invol-
untarily) and became exclusively Pell Grant participating schools. In the 2 years
from 1992 to 1994, 509 schools left the loan program and became exclusively Pell
Grant, a 535 percent increase. Of these schools, 271 or 53 percent, were proprietary
schools.
(63)
64
Among these schools, one in particular, lADE American Schools, attracted the at-
tention of the Staff and became the subject of our case study. In 1992, lADE, facing
the prospect of being disqualified from further participation in Title IV programs as
a result of rising default rate on its student loans, voluntarily ceased processing stu-
dent loan applications for its students. In the 2 years prior to this action, LADE had
drawn down slightly under $4 million in Pell Grants. In the 2 years following its
cessation of loan activity, lADE drew down a total of almost $25 million in Pell
Grants.
The Staff began its investigation of lADE in April 1994. In May 1994, members
of the Staff travelled to Los Angeles to interview lADE students, employees, and
former employees. Within a matter of days of this trip the Staff uncovered what it
believed to be evidence of serious abuses in connection with lADE's participation in
the Pell Grant program. Moreover, the Staffs presence at the school resulted in a
number of potential witnesses seeking out the Staff to volunteer information as to
abuses at lADE.
In the late summer of 1994, the Civil Fraud Division of the Department of Justice
began an investigation of lADE. Subsequently, an lADE employee wrote an anony-
mous letter to lADE's accrediting agency in early 1995 alleging Pell Grant program
abuses at lADE. As a result of this letter, the accrediting agency undertook an un-
announced site visit to lADE which led to the agency's instituting action in March
1995 to withdraw lADE's accreditation. Faced with the possible loss of its accredita-
tion, an ongoing Justice Department investigation, and the Subcommittee's own in-
vestigation, lADE closed its doors on March 13, 1995.
The Staffs investigation of lADE's participation in the Pell Grant program re-
vealed a pattern which has become all too familiar to this Subcommittee over the
years — woefully inadequate training and education, abuse and possible fraud on the
part of school officials, and a continuing inability on the part of the Department of
Education to deter, detect and pursue such misconduct. Specifically, the Staff found
with respect to lADE that;
— many students, including some who could neither read nor write in either
English or Spanish, were enrolled in lADE courses in apparent violation
of Pell Grant Program ability-to-benefit requirements;
— instruction in lADE courses was woefully inadequate, reflecting the ef-
fects of one or more of a variety of problems, including a lack of books
and essential equipment, unqualified instructors, and deficiencies in
course design and curriculum;
— in the large majority of cases, placement of students who had successfully
completed lADE program requirements was completely ineffective and, in
many of these cases, school officials deliberately covered up this fact by
creating false records and engaging in other questionable practices in-
tended to mislead concerned Federal, State, and accrediting officials into
believing that mandatory minimum placement requirements were being
met;
— lADE staff and/or corporate officials engaged widely in abusive and pos-
sibly fraudulent practices — e.g., altering student financial aid files and
computer records, falsifying student signatures on official forms and doc-
uments, and falsifying information on course attendance and grade
sheets — in order to obtain Pell Grants, for example, for students who had
withdrawn from its courses or had enrolled but never attended;
— lADE staff and/or corporate officials deceived and misled Federal and
State government officials, as well as accreditation organization rep-
resentatives, engaged in conducting official reviews of school operations,
policies, and procedures; and
— the accountability Triad (i.e., State licensing and oversight, independent
accreditation, and eligibility and certification determinations by the U.S.
Department of Education) failed to detect, deter, and pursue fraud and
abuse in lADE's training programs and participation in the Title IV Pell
Grant Program.
lADE American Schools
Prior to shutting its doors earlier this year, lADE American Schools was a propri-
etary vocational school licensed by the California State Council for Private Post-
secondary and Vocational Education, and the Florida State Board of Independent
65
Postsecondary Vocational, Technical, Trade and Business Schools. lADE was also
accredited by the Accrediting Council for Continuing Education and Training
("ACCET").
lADE opened its first campus in the South Gate section of Los Angeles in 1983.
Over the next 5 years the school established four additional campuses in and
around the Los Angeles area, as well as a campus in Hialeah Gardens, Florida.
lADE catered almost exclusively to the Hispanic immigrant population in both Cali-
fornia and Florida. In fact, instruction for many of its courses was provided in Span-
ish.
lADE is owned by Abraham Stofenmacher and his sons Bernardo, Alejandro, and
Sergio Stofenmacher, all of whom are citizens of Argentina. In addition to lADE
American Schools, the Stofenmachers own and operate 32 schools in the South
American countries of Chile, Paraguay, Uruguay, and Argentina. There is no record
with the Department of Education that any of these South American schools partici-
pate in any Title IV Student Financial Assistance programs.
lADE's U.S. campuses offered programs of 1 year or less leading to a certificate
in computer operations, professional tractor trailer driving, and automobile repairs.
Courses in English as a Second Language ("ESL") were also offered. These courses
were all eligible for Title IV funding. Additionally, lADE operated a Career Occupa-
tional Training Center ("COTC") which offered primarily citizenship courses. The
Career Occupational Training Center was not authorized to participate in Title IV
programs.
1. Participation in Title IV Programs
lADE became eligible to participate in Title IV Federal Student Financial Assist-
ance programs on August 14, 1989, and has, since that time, participated in the
Federal Pell Grant program and two of the Federal Family Education Loan
("FFELP") programs — the Stafford Loan program and Supplemental Loans for Stu-
dents program. During its initial years of participation, the majority of lADE's stu-
dents received loans rather than grants.
lADE's first 2 years of participation in the student loan programs resulted in de-
fault rates of 33.3 percent in 1990, and 44.6 percent in 1991. As a result, lADE was
placed on the Department of Education's June 14, 1993 list of schools with unac-
ceptably high default rates. Under the amendments to the Higher Education Act
passed by Congress in 1992, had lADE continued one more year with such a high
default rate, it would have been subject to Departmental action which could have
terminated its eligibility to participate in any Title IV student financial assistance
program. To avoid this possibility, lADE notified the Department on October 6, 1993
of its voluntary withdrawal from all student loan programs. In its letter to the De-
fault Management Section of the Department of Education, lADE stated that it had
discontinued processing student loans as of September 16, 1992. Notably, at the
same time that lADE was withdrawing from the loan program, its Pell Grant reve-
nue was increasing dramatically.
Indeed, between 1990 and 1994, lADE experienced a phenomenal growth in the
volume of its Pell Grant receipts, increasing its drawdown by over 1700 percent.
During this same period, the number of Grant recipients grew from 737 to over
9,200. By 1994, nearly all of lADE's students were receiving financial assistance
through the Pell Grant Program.
lADE AMERICAN SCHOOLS
Award Year
Recipients
Dollar Amount
1989-1990
737
2,167
7,192
9.250
10,350
7,298
$ 828,326
3,226,563
10,303,302
14,843,013
16,563,769
11,677,015
1990-1991
1991-1992
1992-1993
1993-1994 .
1994-1995
It seems clear to the Staff that lADE undertook a conscious course of conduct dur-
ing these years to increase its student enrollment, obtain Pell Grant funding for as
many of these students as possible, and maximize the amount of Pell Grant funding
for which these students would be eligible. Indeed, in its final few years of oper-
ation, lADE's participation in the Pell Grant program was so extensive that it had
practically turned into a de facto government sponsored enterprise. From 1992
66
through 1994, lADE's yearly revenue from Pell Grant funding represented between
90-100 percent of its total yearly revenue. At the same time, lADE showed little,
if any, interest in providing a quality education for its students or even in ensuring
that its students completed the course of studies for which the government was pay-
ing.
2. Abuses of Title IV Programs
a. Deceptive Advertising Designed to Attract Students
Our review of lADE American Schools revealed that lADE engaged in a pattern
of abusive practices designed to attract low income, poorly educated, immigrant stu-
dents. In the first instance it did so through the use of a deceptive advertising cam-
paign which offered potential students a "free education."
From 1990 until 1993, lADE spent over $2 miUion running promotional advertise-
ments for its school on Spanish language television and radio stations in the Los
Angeles area. According to former lADE students, this advertising promised poten-
tial students a free education which would lead to a high paying jobs in the fields
of computers, truck driving or auto mechanics. Because lADE's target audience was
comprised primarily of unskilled, uneducated laborers employed in minimum wage
jobs and living at or below the poverty level, these advertisements were ultimately
quite successful in attracting large numbers of new students.
The Staff interviewed several students who had enrolled in lADE's automotive
technician course as a result of these advertisements. Their stories were all quite
similar. Jose Quintanilla told the Staff that he had been attracted in 1991 by an
lADE advertisement stressing the need for trained automotive technicians and
promising job placement in this field. He stated that he went to lADE to obtain
more information and was told that he would receive an excellent education through
lADE which would prepare him to be a qualified automotive technician. He stated
further that he was told that a "diploma" from lADE would enhance his market-
ability and that employers would require such a diploma.
According to Mr. Quintanilla LADE officials told him that he would qualify for
money from the government in the form of grants and loans to cover his tuition.
He said that he was told not to worry about being able to afford the payment on
the loans because by the time his loans came due he would be earning a significant
salary as a result of his training from lADE. Mr. Quintanilla was subsequently
given federal forms to sign for his grants and loans, all of which were entirely in
English. Mr. Quintanilla was not provided with a Spanish translation, despite the
fact that he understood very little English and all of his previous discussions with
lADE officials had been conducted in Spanish. Mr. Quintanilla stated that he had
no understanding of the significance of the forms at the time he signed them.
Miguel Garcia also enrolled in lADE as a result of the school's advertising cam-
paign. He stated that when he went to the school for an interview he was promised
that upon completion of his training he would be given a set of mechanic's tools and
placed in a job at $15 per hour. He was then given papers to fill out and sign which
he was told were for a government grant to pay for his tuition. As was the case
with Jose Quintanilla, Mr. Garcia had no real understanding of the papers he was
signing because of his limited command of the English language. It was only after
he had completed his courses at lADE that Mr. Garcia learned that he had signed
applications not only for a Pell Grant but for a guaranteed student loan as well.
6. Ability to Benefit Testing Manipulated to Maximize Enrollment
As stated previously, lADE focused its recruitment efforts on the immigrant His-
panic population of the Los Angeles area. Most of the potential students lADE at-
tracted had limited formal education; indeed, many had not even graduated from
high school. In accordance with the provisions of the Higher Education Act, lADE
was required to determine that these students had the ability to benefit from the
training offered by lADE before it could obtain federal financial assistance on their
behalf Under rules instituted in 1991, this determination was to be made on the
basis of an independently administered examination approved by the Secretary of
Education.
lADE manipulated the ability to benefit testing process in both blatant and subtle
ways in order to maximize the number of students eligible for financial assistance.
In some cases, lADE simply ignored the results of the testing and admitted students
regardless of their performance. For example, Jose Quintanilla told the Staff that
he was given an ability to benefit test by lADE. He stated that he knew some of
the answers on the test, but that he had not had enough time to complete more
than twelve of the test's fifty questions. Despite not even answering over 75 percent
67
of the test's questions, Mr. Quintanilla was enrolled in lADE the following day. He
candidly told the Staff that he did not understand how he had passed the test.
Perhaps Miguel Garcia's experience explains how Mr. Quintanilla managed to
pass his test. Mr. Garcia was also administered an ability to benefit test by lADE.
According to Mr. Garcia, a test proctor told him that all he needed to do was to
sign his name on the test form and that any unanswered questions would be filled
in for him later by the proctor. Mr. Garcia also told the Staff that he saw individ-
uals taking the test who were illiterate not only in English but in Spanish as well.
He recalled seeing one individual sign his name on the test with an "X." Mr. Garcia
said that he subsequently saw some of these people in lADE courses.
Mr. Garcia's story was confirmed by countless other students and even former em-
ployees who told the Staff that lADE admitted students who could neither read nor
write and who clearly lacked the skills necessary to benefit from the training offered
by lADE. One lADE instructor told the Staff that close to half of the students reg-
istered for his automotive mechanics class could not read or write well enough to
benefit from the instruction. He stated that some of his students had told him that
they had merely written their names on the ability to benefit test and that the rest
"was taken care of by lADE sales or admissions representatives. Another former
lADE instructor told the Staff that he had overheard two of lADE owners saying
that the school needed to enroll twenty to thirty new students per week and that
whatever had to be done to get them enrolled would be done.
In addition to completing tests for students, lADE also engaged in more subtle
means of boosting the number of students admitted on the basis of ability to benefit
testing. One of these means was the use of artificially low cutoff scores for determin-
ing whether a student had passed the ability to benefit test. lADE used an ability
to benefit test developed by E.F. Wonderlic, Inc. which was originally designed to
be used by employers for evaluating job applicants. The cutoff scores established by
Wonderlic were therefore set for this purpose and not for the purpose of determining
ability to benefit from training programs.
Wonderlic subsequently distributed its test to postsecondary vocational schools
such as lADE for ability to benefit testing, advising the schools to use whatever
minimum passing scores were indicated from their experience in using the test.
Wonderlic told the schools, however, that it expected that a school which deviated
from the suggested cutoff scores would have support for such deviation. In 1990,
Wonderlic did establish a separate set of cutoff scores for use by postsecondary voca-
tional schools. Those scores were further revised in 1991 to comply with Department
of Education standards. The cutoff scores as revised are shown in the following
chart:
Vocational Field
Computer Office System Specialist
Automobile Tecfinician
Professional Tractor Trailer Driver
Security Guard
English as a Second Language
lADE established a cutoff score of 10 for all vocational fields, far below that sug-
gested by Wonderlic. The school defended its cutoff score on the grounds that: 1)
prior to 1991, federal laws and regulations did not mandate scoring standards for
ability to benefit tests; 2) Wonderlic's cutoff scores were only guidelines and not re-
quirements; and 3) the cutoff score of ten was developed based on racial/ethnic con-
version data published by Wonderlic.
While lADE is correct that scoring standards were not mandated prior to 1991,
it was required at that time to comply with any applicable criteria for ability to ben-
efit scoring established by its accrediting agency. In this case, lADE's accrediting
agency, ACCET had instructed its schools that deviations from test publishers'
guidelines would only be allowed with written permission of the publisher and writ-
ten concurrence of the ACCET accrediting commission. lADE had obtained neither.
lADE's reliance on Wonderlic's conversion data is similarly misplaced. Wonderlic's
Vice President Eliot Long told the Staff that the ethnic conversion data was not in-
tended to be used in an assessment of a potential student's ability or likelihood of
successful performance, but rather was intended in assessing job candidates. He fur-
ther told the Staff that any use of this data outside of the employment area would
be incorrect. Moreover, the fact that lADE administered the Wonderlic exam in
Spanish as opposed to English mitigated against the need for using any conversion
Prior To
5/90TO
After
5/90
7/91
7/91
21
16
15
19
14
13
18
15
13
14
11
10
10
10
10
68
data on behalf of Hispanic students. Mr. Long pointed out that WonderUc rec-
ommends using the same minimum passing score for students tested on the Spanish
language version of the test as for those tested on the English language version.
The issue of lADE's artificially low cutoff scores was noted by both lADE's own
independent auditor and the Office of Audit of the Department of Education's In-
spector General's office. In a March 30, 1992 audit report, lADE's auditor noted that
twenty percent (twenty-one out of 101) of a sample of student files drawn from
lADE's records revealed students who had failed to achieve the test publisher's min-
imum passing score on the ability to benefit test. On the basis of this finding, the
auditor recommended that lADE review all student files to determine whether stu-
dents admitted on the basis of ability to benefit testing had in fact achieved at least
the minimum passing score on the test.
In a September 1993 audit report, the Inspector General found that lADE was
unjustified in using its low cutoff scores on ability to benefit testing. On the basis
of this finding, the Inspector General determined that the school had improperly
disbursed over $1.2 million in student financial assistance during the period July
1, 1989 through March 4, 1992. Of this figure over $845,000 represented improperly
disbursed Pell Grants.
As a result of lADE's manipulation of ability to benefit testing the school ended
up with a student population the vast majority of which was comprised of ability
to benefit students. Indeed, in a 1992 review of lADE's ability to benefit program,
the Accrediting Council on Continuing Education and Training ("ACCET") noted
that nearly 100 percent of lADE's students had been admitted on this basis. In
1992, however, Congress amended the definition of "eligible institution" contained
in the Higher Education Act to provide that an otherwise eligibk institution that
does not offer programs for which at least an associate or bachelors degree is of-
fered, loses its eligibility if more than 50 percent of its students are ability to benefit
students. If ACCET's review was correct, then lADE's continued eligibility to par-
ticipate in student financial assistance programs would have been thrown into doubt
as a result of this amendment.
When the Staff raised this issue with Ken Williams, lADE's former Director of
Financial Aid, he disputed ACCET's findings. He did, however, agree that lADE
would have had a very difficult time meeting the 50 percent requirement. He in fact
admitted that the majority of students at lADE were ability to benefit students,
though he put the figure at probably closer to 60 percent than 100 percent. Both
a former financial aid director and a former program director at one of lADE cam-
puses presented a different picture, though, from Mr. Williams. These officials told
the Staff that they saw very few students admitted to lADE who were not ability
to benefit students. Other former directors and employees at lADE told the Staff
that accurate figures on ability to benefit students were not available.
The CPPVE, lADE's State licensing agency, was also concerned about this issue.
In 1993, the CPPVE directed lADE to provide an accurate accounting of its ability
to benefit students and a description of the procedure to be established to derive
this accounting. lADE never complied with this directive.
lADE's manipulation of the ability to benefit testing apparently continued
throughout its existence. In an interview with Eliot Long, Vice President of
Wonderlic Personnel Test, Inc., the Staff learned that as recently as January 1995,
Wonderlic had terminated the registration of eight test administrators from lADE
and had placed another four on probation after finding irregularities that were in-
consistent with proper test administration and scoring.
Mr. Long explained to the Staff that Wonderlic conducts an annual review of each
Independent Test Administrator's registered test scores. When it did such a review
for lADE's administrators, Wonderlic found many had abnormally high passing
rates. This prompted Wonderlic to schedule an on-site audit of lADE's test records.
Wonderlic sent auditors to each of lADE's six locations in the Los Angeles area.
These auditors reviewed approximately 200 selected test records at each site. These
records were of students who had graduated, dropped out, withdrawn, and were no-
shows. Mr. Long said the purpose of this audit was to look for patterns of irregular-
ities rather than problems with individual records.
The auditors confirmed that there was an exceptionally high passing rate for tests
administered by certain test administrators at lADE. In particular, the Wonderlic
auditors found that a large number of tests had been age adjusted, resulting in an
unusually high percentage of students passing the test solely on the basis of the age
adjustment. Of those who passed with scores significantly above the minimum, few
had been age adjusted. Based on the age of the lADE student population and estab-
lished norms for age adjustment, Wonderlic determined that lADE was misreporting
the age of a significant number of its students.
69
The auditors also found that a significant number of the tests appeared to have
more than one person's handwriting on it. For example, the auditors found signa-
tures that did not match the handwriting on the answer sheet and answers on a
number of different test sheets which appeared to be in the same handwriting. As
a result, Wonderlic charged that someone other than the student had completed the
test in order to insure a passing score.
Lastly, the auditors found that test administrators at the Oxnard campus were
giving classes on how to take tests, such as the Wonderlic Ability-to-Benefit test,
prior to administering such tests. Administrators were also suspected of providing
the answers to the Wonderlic test during these training sessions.
As a result of these findings, Wonderlic terminated the registration of eight lADE
independent Wonderlic Test Administrators and suspended the registration of four.
Mr. Long told the Staff that lADE did not contest any of Wonderlic's findings.
c. Calculation of Course Length Manipulated to Maximize Amount of Pell Grants for
which Students would be Eligible
In addition to attempting to maximize the number of Pell eligible students it en-
rolled, lADE also attempted to maximize the amount of Pell Grants for which these
students would be eligible. Only a few months after lADE first began participating
in Title IV programs, the school changed the method by which it measured the
length of its courses. The result of this change was to make lADE eligible to receive
more than twice the amount of Pell Grants it otherwise would have received without
this change.
In its initial application for institutional eligibility and certification in September
1989, lADE measured its courses in terms of clock hours, with various programs
ranging anywhere from 180 clock hours for a program in electronics technology to
700 clock hours for a program in automobile electricity, tune-up and brakes techni-
cian. Under provisions of the Higher Education Act in effect at that time, short term
programs of less than 600 clock hours were eligible to participate only in the guar-
anteed student loan program. As a result, many of lADE's programs were not eligi-
ble to participate in the Pell Grant program. By converting from clock hours to cred-
it hours, lADE was able to suddenly make many of these programs Pell eligible. The
conversion from clock hours to credit hours also enabled lADE to collect even great-
er amounts of Pell funds for those of its programs which already had been Pell eligi-
ble. When the Staff discussed the conversion with officials from ACCET, lADE's ac-
crediting agency, they readily admitted that except for the increased access to stu-
dent financial assistance, there was no other benefit in lADE's switching from clock
to credit hours. Indeed, even lADE's former Financial Aid Director admitted to the
Staff that the only reason for the conversion was to obtain more Pell funds.
At the time lADE undertook this action there was no federally mandated formula
in effect for converting from clock to credit hours. The Higher Education Act did de-
fine an academic year as consisting of 900 clock hours or 24 credit hours. By impli-
cation, one could thus presume that 37.5 clock hours equalled one credit hour (i.e.,
900/24 = 37.5); however, this formula was not explicitly required until just last year.
In the absence of any federal formula, lADE converted its clock hours to credit
hours using a formula provided by its accrediting agency, ACCET. This formula pro-
vided that fifteen hours of classroom instruction was equal to one credit hour.
Using this formula, a 300 clock hour program, which previously would not have
been eligible for Pell funding, became a 20 credit hour program which was Pell eligi-
ble. Moreover, a 700 clock hour program, which previously would have been com-
pleted in the span of just one Pell award year, became a 46.6 credit hour program,
thereby stretching over two Pell award years. The Department of Education ap-
proved lADE's conversion in March 1990, despite the fact that only the month be-
fore the Department's Inspector General had issued a Management Improvement
Report highlighting the abuses in this area and stating that instead of relying on
accrediting agencies to limit the abuses, the Department needed to take more direct
action itself
d. lADE Failed to Provide Students with a Quality Education
While lADE apparently expended much time and effort on maximizing the
amount of Pell funds it could obtain, it seemed to spend little time or effort on pro-
viding its students with a quality education. Indeed, the only time lADE seemed
concerned with its students' education was when it had to demonstrate the nature
of that education to State, federal or accrediting agency reviewers.
The Staff interviewed numerous students and instructors concerning this issue.
The common thread running through all of these interviews was the poor quality
of the education offered by lADE. While the Staff found many dedicated instructors
70
working at lADE, their efforts were consistently undermined by lADE's owners and
senior management.
Arnoldo Sanchez, lADE's former Curriculum Coordinator, told the Staff that the
training students received in the automotive technician program was clearly inad-
equate to qualify them for a job as an auto mechanic. He explained that there typi-
cally was not enough equipment at the training sites to enable students to obtain
the necessary hands-on experience. As an example he cited a course given at lADE's
South Gate campus which had only two oscilloscopes for a class of more than twenty
students, a ratio of students to equipment of more than 10-to-l. Mr. Sanchez noted
that lADE's accrediting standards required that there be no more than a 5-to-l ratio
of students to equipment.
School officials covered up this deficiency during reaccreditation site visits by tell-
ing the accrediting team that students were trained on this equipment in groups
of five. This, Mr. Sanchez stated, was a lie. In fact, according to Mr. Sanchez, the
lack of sufficient equipment meant that students did not receive training adequate
to teach them how to use the equipment.
Other students and instructors confirmed Mr. Sanchez's comments. The Staff was
told that automotive technician classes often consisted of more than two dozen stu-
dents crowding around a the engine of a single car, making it nearly impossible for
each student to see the part of the engine being worked on. Students stated that
lADE often did not even provide engines for students to work on, necessitating that
students or instructors bring in their own cars in order for students to obtain hands-
on experience. One instructor told the Staff that his students had tried to talk him
into bringing in his car so the students could work on it in class. He stated that
he refused because he was not confident enough of his students' abilities to let them
work on his own car. An lADE student with whom the Staff talked was not so
smart. He was convinced to bring in his own car for his fellow students to work on
in class. He told the Staff that in the course of learning how to fix cars they so ru-
ined his car that it never ran properly again.
Once again, however, when the time came for lADE's reaccreditation site visit,
the school suddenly obtained a new engine for its students. Unfortunately, none of
the students was allowed to train on the engine. Indeed, they were told they were
not even to touch it. When the accrediting team left the campus, so did the engine.
lADE's efforts to spruce up for reaccreditation visits were evidently quite blatant.
A Department of Education IG investigator told the Staff of accompanying officials
of the CPPVE on an unannounced site visit to lADE. The investigator stated that
at the time they arrived they found lADE in the midst of preparing for a
reaccreditation site visit. According to the investigator, as they walked around the
school's campuses they noticed that additional equipment was "coming out of the
woodwork." Strangely enough, though, the investigator apparently took no action to
inform the accrediting agency of her observations; nor did she refer the matter for
further follow-up by the IG itself The reasoning the investigator gave the Staff for
this was that she had only been at lADE to act as an interpreter for the CPPVE
officials and had not been there in an investigative capacity.
The problems experienced in the automotive classes were also prevalent in other
courses of instruction at lADE. A former accounting instructor told the Staff that
it was extremely difficult to teach proper accounting when the only equipment he
was provided by the school consisted of a $5 software disk without documentation.
The Director of lADE's English as a Second Language program told the Staff that
she was unable to obtain textbooks for most of her courses. She stated that she im-
provised with newspapers and magazines, but that many other ESL teachers simply
refused to teach without books. As a result, students would go for weeks without
any instruction. Many students quit because of these problems. It was only toward
the end of the course that the ESL classes were finally given materials. These mate-
rials, however, consisted of only photocopies of textbooks.
A former Computer Operations instructor told the Staff that the computers used
in his classroom were outdated and often in non-functional condition. He stated that
days often went by before the computers would be fixed and that during that time
there were no back-up machines to continue the students' training.
The instructor also said that there was no written curriculum for the computer
class until just prior to lADE's 1992 reaccreditation site visit. In anticipation of the
visit, curricula were hastily prepared and instructors were briefed by Bernardo
Stofenmacher, one of lADE's owners and officers, as to what to say and how to re-
spond to the accrediting team members.
e. lADE Failed to Provide Students with Adequate Placement Services
In addition to failing to provide its student's with a quality education, lADE also
failed to provide them with adequate placement services. In contrast to its enticing
71
advertising claims of over 70 percent placement and its promises to students of jobs
with beginning wages ranging from $7 to $15 per hour, lADE did little to assist its
students in finding employment in the fields for which they had trained. To hide
this fact from accreditors and regulators, lADE engaged in a pattern of deception
and falsification designed to make it appear that minimum placement requirements
were being met.
In March 1992, ten former lADE students sued the school for breach of contract,
false advertising, intentional and negligent misrepresentation, and unfair business
practices. All the students had been in lADE's automotive technician program in
1990 and 1991. All had been promised job placements by lADE officials at wages
starting at $7 to $8 an hour. Although the students discovered during the course
of their lawsuit that lADE's records listed them as having been placed, none had
been able to secure a job as an automotive technician. According to the students,
lADE's job placement service consisted of escorting the students to the local unem-
ployment office.
Students in lADE's Truck Driving and Computer Systems programs also com-
plained about failed promises with regard to placement. They stated that lADE of-
fered them no placement assistance and would not even return the phone calls of
students who sought assistance. Most of these students were either unemployed or
employed in areas unrelated to their training. Indeed, a review of a random sample
of the placement records of students in these programs showed the following results:
Graduate/Program Job Title/Responsibilities
Edin, Computer Operations pit boss in a casino (hired before lADE training)
Gabriel, Truck Driving pipe fitter's helper
Jose, Computer Operations packs bags
Veronica, Computer Operations retail clothing store
Hector, Truck Driving manages property
Carlos, Truck Driving construction development
Yolando, Computer Operations shipping and receiving
Jesus, Computer Operations bartender
Everardo, Computer Operations shipping clerk
lADE's poor placement services almost led to the school losing its accreditation
in July 1992. During a reaccreditation site visit that year, ACCET not only found
lADE's placement services to be "deficient," but stated that "the results of its place-
ment efforts are detrimental to its perceived integrity and stature in the commu-
nity." According to ACCET's report, lADE failed to follow the accreditation agency's
policies with respect to its placement services. Of the seven lADE branch campuses
reviewed by the reaccrediting team, one received a rating of "2" out of a possible
"4" in this area, signifying that the branch was "weak" and needed some changes
to meet the agency's standard. The remaining six each received a rating of "1," sig-
nifying that those branches' policies were "unacceptable" and that "major changes
[were] needed to meet the [agency's] standard."
Partly as a result of lADE's problems with placement services, ACCET deferred
granting lADE reaccreditation until April 1993, pending receipt of additional infor-
mation and a follow-up visit to all branch campuses. When those follow-up visits
took place in March 1993, the ACCET reviewers found what they termed a "dra-
matic turnaround" from the placement statistics reviewed in the previous site visit.
What the reviewers did not know, however, was that this dramatic turnaround was
the result of an elaborate pattern of deception directed by the highest levels of
lADE's management.
Maria McFarlane, a former lADE placement counselor, informed the Staff of what
she called a virtual "dirty tricks" crew — almost all of whom were illegal aliens —
which was used by lADE to falsify and inflate placement statistics. According to Ms.
McFarlane, eight to ten lADE employees were sent to the local courthouse to obtain
the names of companies which had filed for bankruptcy. These companies were then
cited in lADE's records as locations where students had been placed, with the full
knowledge that there was little chance that any verification could be done.
Arnoldo Sanchez, another former lADE employee, told the Staff of other methods
utilized by Bernado and Sergio Stofenmacher to falsify placement data and deceive
the reaccrediting team in connection with ACCET's follow-up visit. According to Mr.
Sanchez, he was directed by Sergio Stofenmacher to disconnect one of lADE's FAX
machines and to answer that number as if it were a place of business. Another
lADE employee then gave the ACCET reviewers the number, telling them that it
was the number of a business which employed lADE students. When the reviewers
72
called the number, Sanchez answered and "confirmed" that the particular student
in question worked there.
Mr. Sanchez told the Staff that during the follow-up visit "everything was a show"
designed to cover up lADE's problems and to fool ACCET's reviewers into believing
that lADE had come into compliance with the accrediting agency's requirement's.
For example, Mr. Sanchez stated that lADE gave the ACCET reviewers copies of
letters purporting to show how the school had attempted, albeit unsuccessfully, to
contact students regarding placements. These letters, however, had been delib-
erately sent to addresses where the students did not reside solely for the purpose
of being able to claim that attempts had been made to place students. Anotner em-
ployee told the Staff that placement coordinators were directed to tell automotive
students to become independent contractor mechanics. In this way the school could
list the student as a successful placement.
lADE officials also attempted to deceive the Staff concerning its placement record.
In the course of the our investigation, lADE official's provided the Staff with thirty-
six letters purporting to be from employers of lADE graduates. When the Staff at-
tempted to contact some of these "employers," however, we found quite a different
story. Of the employers the Staff reached, four had heard of lADE, but stated that
they had never hired anyone from that school; moreover, they did not recall ever
sending lADE a letter stating otherwise. One employer stated that he not only had
not hired anyone from lADE, but that he had never heard of the manager who pur-
portedly signed the letter on behalf of his business.
Of those employers which did confirm having hired lADE students, one was a gas
station owner who told the Staff that the person hired had not worked out because
he could not speak English. An owner of an import/export company told the Staff
that he had an lADE student working for him, but stated that he had employed
the student before she decided to go to lADE. The owner of an oil changing center
informed the Staff that he had hired three lADE automotive technician graduates.
He stated that they were well trained to change oil and transmission fluid and to
lubricate a chassis, but that that was about all they could do.
f. lADE Falsified Student Records Both to Obtain Pell Grants and to Avoid Making
Required Refunds of Pell Grants
The Staffs investigation has also revealed that lADE engaged in widespread pat-
tern of altering student financial aid files, including the forgery of student signa-
tures on official forms and documents and the falsification of information on course
attendance and grade sheets. These actions were consciously undertaken for the
purpose of obtaining Pell Grants for students who had never enrolled at lADE and
of avoiding making required refunds for students who had enrolled but had subse-
quently dropped out. As a result of these actions, lADE improperly obtained, and
retained, millions of dollars in federal student financial assistance funds.
The Staff discovered that numerous students who had merely inquired about
lADE's programs without ever enrolling unwittingly became "students" in lADE's
records for whom the institution received multiple Pell Grants. Such is the case of
Maria Arana. On February 1, 1994, Ms. Arana went with a friend to the Santa Ana
campus of lADE to inquire about taking computer courses. When she arrived at the
campus, Ms. Arana was introduced to a woman named "Anna" who told her that
she could take both English classes and computer classes at lADE and that she
would be eligible to obtain financial assistance to pay for these courses. Ms. Arana
was told that all she needed to do to obtain this assistance was to provide Anna
with her tax return, a driver's license, and a passport. Ms. Arana gave these items
to Anna and was then taken to another location to take an English placement exam-
ination.
When Ms. Arana returned from taking the English examination she was given a
series of forms to sign. She confirmed to the Staff that one of these forms was the
Free Application for Federal Student Aid (the "FASA"). Ms. Arana commented to
the Staff that she had thought it odd that the FASA was already filled out with
her financial information because she had not yet told anyone that she intended to
enroll.
In fact, Ms. Arana decided not to enroll at lADE. She told the Staff that she felt
that Anna had been too pushy and that she seemed more interested in getting her
to sign forms than in explaining to her what lADE had to offer. Despite Ms. Arana's
decision not to enroll at lADE, it appears that lADE nevertheless "enrolled" Ms.
Arana.
The Staff examined lADE's student records and found Ms. Arana's name on a list
of no-show students whose enrollment date was February 1, 1994. Giving lADE the
benefit of the doubt, it is possible that among the various forms she signed the day
she visited lADE, Ms. Arana may have unwittingly signed an enrollment contract.
73
It thus would not be inappropriate for Ms. Arana's name to show up on a Hst of
no-show students, particularly given Ms. Arana's statement to the Staff that she did
not, in fact, attend lADE.
An examination of lADE's Master Sheets, however, uncovered additional informa-
tion relating to Ms. Arana which was quite disturbing. Master Sheets are docu-
ments maintained by lADE for each enrolled student. The Master Sheet shows,
among other things, the particular classes the student has taken, whether the stu-
dent has maintained satisfactory progress, and the date and amount of any financial
aid received.
The Staff discovered that included among LADE's Master Sheets was one for Ms.
Arana. This Master Sheet recorded Ms. Arana as having started a program in Eng-
lish as a Second Language on February 9, 1994, with a scheduled graduation date
of February 1, 1995. The Master Sheet further showed Ms. Arana as making satis-
factory progress in this program through September 28, 1994. Most disturbing, how-
ever, is the fact that the Master Sheet also shows LADE as having received two pay-
ments on a Pell Grant for Ms. Arana of $1150 each on February 9, 1994 and June
10, 1994. Department of Education records confirm that a $2300 Pell Grant was
paid on behalf of Maria Arana.
In light of Ms. Arana's statement to the Staff that she never attended lADE, the
only way in which lADE could have maintained the information which it had for
Ms. Arana (and therefore the only way in which it could have obtained a Pell Grant
for Ms. Arana) would have been through the wholesale creation of phony attendance
and academic records.
Unfortunately, the case of Ms. Arana is not an isolated instance. The Staff discov-
ered numerous other examples of LADE having fabricated student records in order
to obtain Pell Grants on behalf of students who never attended. Indeed, the Staff
found Master Sheets showing academic progress and Pell Grant disbursements for
thirteen students in addition to Ms. Arana who were listed by lADE as no-shows.
According to the Department of Education's Student Payment Summary, lADE re-
ceived over $24,875 in Pell Grants on behalf of these students. The Staff found no
record of lADE ever having made any refunds for any of these students, including
Ms. Arana.
lADE's fabrication of records to create enrolled students was blatant and inten-
tional. Moreover, this fabrication went beyond the creation of "ghost" students and
included the falsification of records pertaining to students who had in fact enrolled
but subsequently withdrew or dropped out of school. Maria McFarlane, a former Fi-
nancial Aid administrator, told the Staff that student educational and financial aid
records were altered by Ken Williams, lADE's corporate Financial Aid Director, and
his assistant, Melissa Cuesta, at the direction of Sergio Stofenmacher in order to
cover up the fact that lADE had failed either to make required Pell Grants at all,
to make them in the proper amount, or to make them within the required time
frame.
According to Ms. McFarlane, if LADE had received a Pell Grant check on behalf
of a student who had withdrawn before completing at least half of his course, the
information on the student's Master Sheet would be changed to make it appear that
the student had completed half the course. Ms. McFarlane told the Staff that Mr.
Williams and Ms. Cuesta sometimes came into LADE's offices at 2 or 3 o'clock in
the morning to make such changes. Comments she overheard Mr. Williams making
further increased her concerns about what he was doing — for example, Ms. McFar-
lane stated she had overheard Mr. Williams at one time telling Ms. Cuesta to
"watch your mouth" when she was apparently saying something in front of others
that he did not want to be known.
Ms. McFarlane also told the Staff that Sergio Stofenmacher had instructed a
number of other employees to engage in the falsification of records. In particular,
Ms. McFarlane stated that she observed Taimi Aleman, a former administrator at
lADE's corporate headquarters, alter attendance records and fabricate examinations
and other educational records for students who had dropped out. According to Ms.
McFarlane, the effect of these actions was to lessen the amount of refunds lADE
would otherwise be required to make or in some cases, to allow lADE to evade mak-
ing any refunds at all. Ms. McFarlane said that she personally observed Ms. Aleman
alter hundreds and possibly thousands of students records in this manner at Ser-
gio's direction.
The Staff learned of additional abuses of the student record system from other
lADE employees. Shirley Diaz, the former Financial Aid Director at lADE's South
Gate campus, told the Staff that when she first started working for lADE, Pell
Grant checks were not cashed until the school confirmed that a student was actually
attending classes. She stated that subsequently Sergio Stofenmacher directed that
students' financial papers should be processed and that Pell Grant checks should
74
be issued and cashed before the students even started classes because lADE was
"tight in its budget" and needed the award money.
Ms. Diaz further told the Staff that her original practice (and the required prac-
tice under federal rules) was to post no-show stuaents and student drops to the
record system as thev occurred. She stated that she was subsequently directed not
to post no-shows or drops at all because to do so would generate too great a refund
liability for which lADE did not have the money. As a result of this directive, Ms.
Diaz did not post no-shows and drops for approximately six or 7 months in 1993.
Ms. Diaz estimated that this led to a backlog of some 900 students for whom lADE
had improperly collected Pell Grants because they had not been properly posted in
the records system as no longer being enrolled.
Apparently, this deliberate failure to post drops and no-shows went on for quite
some time. On July 14, 1994, Ken Williams addressed a memorandum on this issue
to the Stofenmachers and lADE's Corporate Counsel Gonzalo Frixes. Interestingly,
this memorandum was marked urgent and confidential and stated that it was not
to be shared with anyone other than those to whom it was addressed. In his memo-
randum Mr. Williams stated,
there are approximately 1,607 students who are no-shows, withdrawals, ter-
minations, etc. who have not been posted to the RGM system as no longer
enrolled. Approximately 75 percent of lADE's students who drop trigger re-
funds. In turn, the average refund for [sic] due for each student for whom
a refund is triggered is approximately $859. As such, these students when
posted will create approximately $1,035,310 in additional refunds.
Mr. Williams went on to estimate that as of June 30, 1994, lADE's total liability
in refunds due, including both posted and non-posted refunds, was nearly $2.5 mil-
lion.
Mr. WiUiams' memorandum is amazing in its candor and provides perhaps the
clearest picture of the types of abuses which were occurring at lADE. For example,
at the beginning of his memorandum Mr. Williams stated,
As you are aware, during this same period between 7/1/93 and 6/30/94 in
order to increase cash flow we eliminated a number of checks and balances
which allowed checks to print which would not normally have printed and/
or been deposited into lADE's general fund.
Relaxing previously existing procedures allowed lADE to significantly in-
crease cash flow in the short run. However, in the long run, the changes
dramatically increase the amount of refunds due. For example, many of the
students for whom we printed and deposited checks, should never have re-
ceived any Pell funds at all. Consequently, as soon as the drop information
is posted for these students, we will be forced to pay back ALL [emphasis
in original) of the money we received for them. As I warned when lADE's
senior management first decided to do this, the long term implications for
refunds owed has been dramatic.
Later in the memorandum, Mr. Williams recommended that lADE should begin
paying and posting refunds. He then went on to state.
It should be noted that it may be possible to move some of these payments and
postings back by as much as two to 4 weeks. However, the greater the delay the
greater the risk we run in terms of audits, excess cash, reimbursement and/or hav-
ing our aid eligibility and/or license to operate terminated. Perhaps as significantly,
because RGM is also required to undergo Federal audits, RGM has threatened that
it might be forced to eliminate lADE's ability to post its own refunds. If this were
to happen, we would actually have to provide deposit slips to RGM for each refund
made and wait until they had the opportunity to post the refund as paid before it
would show on the system. This would totally eliminate our ability to post refunds
cts paid before they really were. The implications for our ability to quickly "fix" things
during an audit are obvious, [emphasis in original]
Perhaps most incredible is the concluding admonition contained in Mr. Williams'
memorandum in which he warned of the consequences of not correcting the refund
problem. There he stated,
lADE will be required to undergo what are now annually required student
aid audits and will, as we have already been admonished by the Nunn
Committee, will be required to provide AUDITED FINANCIAL [emphasis
in original) statements. These audits coupled with the audited financial
75
statements will, given the auditor's familiarity with the RGM system, re-
veal the unpaid refunds. Even if we retained an auditor unfamiliar with
RGM, the refunds would either be discovered during the file review or
would be discovered when the auditor, as required by Federal law, met with
RGM. In fact, all an auditor would have to do at this point to discover the
unpaid refunds would be to look at our bank statements for the period be-
tween 7/1/93 and 6/30/94. The statement would show no refund deposits ex-
cept for $284,866 for the entire award year. They would show only Federal
Funds transfers. Given the prior response of the US Department of Edu-
cation and ACCET's prior concerns regarding our past refund problems
they would almost certainly move to revoke aid eligibility and accreditation
if it were discovered that we had failed to pay refunds after convincing
them that we had solved our prior problems. Frankly, even once the re-
funds are paid, they are already late. As such, the longer we wait to pay
the refunds the greater the risk to LADE. Our biggest dilemma is that
though we could once again relax check printing procedures to generate
more income in order to pay the 93-94 refunds, this would only create more
refunds next year and make the problem worse assuming we could hide it
for another year which, frankly, we can't. Frankly, in hght of the Nunn in-
vestigation, if they discovered and could prove that LADE had deliberately
hidden refunds and provided false information to Congress, lADE's senior
management could face criminal prosecution. I say this not to scare you,
but to point out as I have before that we have to fix this problem before
it is discovered by some outside agency.
Earlier this year, in response to an unannounced visit by ACCET which discov-
ered the problem of no-show students, Abraham Stofenmacher admitted that there
was an "unusual set of circumstances during a portion of the 1993-1994 Federal aid
award year which inadvertently [emphasis in original] resulted in a limited number
of students who signed enrollment agreements but never began classes receiving
Title IV Funds." According to Mr. Stofenmacher, "a limited number of enrollment
status errors by academic clerks within LADE's Office of Education unintentionally
bypassed a series of institutional controls designed to prevent this type of problem
from occurring. . . ." In light of the document alteration and falsification uncovered
by the Staff, and particularly in light of the July 1994 Ken Williams memorandum,
the Staff finds Mr. Stofenmacher's reference to a "limited number" of errors "unin-
tentionally" causing ineligible students to receive Pell Grants to be somewhat dis-
ingenuous.
3. Where Did The Money Go?
As has been mentioned previously in this statement, lADE American Schools took
in approximately $58 million in federal Pell Grant money from 1990 to 1995.
Throughout most of these years, this money represented between 90 percent and
100 percent of lADE's yearly revenue. Based on what the Staff discovered during
its investigation, it appears that very little of that money was used by lADE to pro-
vide books, supplies, equipment, placement services, or any of the other necessities
of a quality vocational education. Most of its buildings were leased, as was almost
all of its equipment such as computers and photocopiers. Moreover, much of the fed-
eral money which lADE did receive was for students who either withdrew or never
attended and for whom lADE therefore incurred little or no expenses. In light of
this, one would think that LADE should have had no cash flow concerns. A closer
examination, however, shows that LADE has been in serious financial difficulties for
a number of years.
The Staff obtained a Business Information Report on lADE from Dun & Brad-
street Information Services. These reports are compiled by Dun & Bradstreet based
on information supplied to it directly by the company itself, as well as other public
sources of information. The Dun & Bradstreet report paints a revealing portrait of
lADE's financial condition.
For example, the report's Payment Summary section shows that lADE was late
by an average of 78 days in paying its obligations. One creditor had even placed
lADE in collection for a past due obligation in the amount of $30,000. In addition,
lADE had a number of judgments and liens filed against it. Included among these
was a judgment of $27,651 entered in March of this year as a result of a suit filed
against lADE by five former students claiming that the school failed to provide the
training and job placement which it had promised in its advertising. Among the
liens filed against lADE were a lien for over $4,000 filed by the State of Florida
for unpaid State taxes, a lien of over $137,000 filed by the State of California for
unpaid State taxes, and a lien for over $400,000 filed by the IRS for unpaid federal
76
taxes. In addition, a mechanics lien of $1,100 had been filed by Oxnard Building
Materials Company for items purchased for lADE's South Gate campus.
Representatives of Dun & Bradstreet told the Staff that officials in the Depart-
ment of Education's student loan section regularly reviews its reports and are pro-
vided updates whenever a school participating in the loan program starts paying ob-
ligations late, submits new financial statements, or incurs a judgment or lien. Ac-
cording to these representatives, though, the Department's Pell Grant section has
no similar arrangement; nor apparently do they receive this information from the
loan section.
The Staff also obtained a sense of lADE's financial difficulties from interviews
with various lADE employees. Many told the Staff that from time to time their pay-
checks were not honored by the bank for lack of funds. Deborah DeVries, lADE's
former Director of Education, stated that on at least two occasions, one in May 1992
and another in March 1993, her paycheck was not honored. She also complained
that in May 1994 she was still waiting for payment from lADE for two in-service
training workshops which she had conducted in October 1993.
Luz Zamorena, lADE's former Office Manager and Director of Personnel, told the
Staff that lADE's financial problems seemed to start about the time Sergio
Stofenmacher came to the school in 1990. According to Ms. Zamorena, the first signs
of problems showed up in the accounts payable area. Beginning in 1990, accounts
which previously had always been paid on time increasingly became past due. Ms.
Zamorena also confirmed to the Staff that on at least three occasions, once in 1992
and twice in 1993, her paycheck, and those of at least fifty other employees, was
not honored. Arnoldo Sanchez, lADE's former Curriculum Coordinator, similarly
told the Staff of paychecks bouncing in 1993 and 1994.
Where then did the money go? According to Mr. Sanchez, lADE's problems with
insufficient funds often seemed to coincide with those times when Abraham
Stofenmacher returned to Argentina. While the Staff was unable to confirm his in-
formation, Mr. Sanchez stated that it was generally known that when Abraham
Stofenmacher travelled to Argentina he normally took a suitcase of money with him.
Ms. Zamorena told the Staff that another reason for lADE's poor financial condition
was that Sergio Stofenmacher took $100,000 from lADE's Federal Funds Account
and put it into a bank certificate of deposit. The existence of a $100,000 certificate
of deposit was also confirmed by lADE's Corporate Financial Aid Director, who stat-
ed that the certificate was used at one point to pay off some of the refunds lADE
owed. The Staff was unable to ascertain whether this certificate was taken out in
Sergio's name or in lADE's name; however, a review a lADE's financial statements
shows no reference to lADE's holding such a certificate.
Another lADE employee told the Staff of an argument he overheard between Ser-
gio and his father Abraham in the latter part of 1993. The employee stated that
he did not understand what was being said because the two were arguing in Span-
ish; however, some Spanish speaking co-workers who had also overheard the argu-
ment explained to him that Abraham had accused Sergio of diverting funds from
lADE. Apparently, Sergio owned a number of companies, both related and unrelated
to lADE. According to the explanation provided by the co-workers, Abraham had ac-
cused Sergio of using lADE funds to pay the employees of these companies. The co-
workers also explained that Abraham accused Sergio of using lADE funds to write
checks to his girlfriends.
In addition to the statements of lADE's employees, the Staffs review of lADE's
general ledgers and check registers also provided some interesting information as
to where some of lADE's money was going. The Staff undertook a limited review
of checks written by lADE during the 6 month period of August 31, 1993 through
January 31, 1994. During this time period lADE's revenue from Pell Grant
drawdowns was $8,382,000. As the Staff has noted previously, lADE's total yearly
revenue was comprised almost 100 percent of Pell Grant drawdowns. The Staffs re-
view uncovered the following payments for this 6 month period:
77
Payee
Abraham Stofenmacher
Alejandro Stofenmacher
Bemardo Stofenmacher
Sergio Stofenmacher
Alley Parking
Casa Management
COTC
lADE American Schools
KMEXTV
T&P Advertising
Mercedes Benz
BMW Credit Corp
District Attorney Child Support
Total
Num-
ber of
Total Paid
Checks
8
$ 7,097.97
11
92,951.75
11
84,591.75
35
161,483.50
37
112,050.00
40
181,050.00
19
41,650.00
100
1,449,829.77
12
266,660.00
30
262,920.00
22
14,144.72
11
5,283.70
13
2,541.50
$2,682,254.66
The Staff notes that Alley Parking, Basa Management, COTC, and T&P Advertis-
ing, which received a total of almost $600,000 during this time period, are all com-
f)anies owned by the Stofenmachers. The payments to T&P Advertising are particu-
arly noteworthy. T&P was an advertising agency created by Sergio, Bernardo and
Alejandro Stofenmacher. According to lADE's former General Counsel, by creating
its own company lADE could place its advertising at the 15 percent discount rate
normally offered to advertising agencies. Given the amount of money lADE commit-
ted to advertising, this type of discount could be quite significant.
It appears, however, that although LADE apparently paid T&P for advertising
services, T&P did not always pay for lADE's advertising. For example, the Staff
compared a breakdown of invoices and payments prepared by KMEX TV against
lADE's general ledger and check register. During the 6 month period examined by
the Staff, each of the payments received by KMEX TV can be traced to a check writ-
ten directly from lADE's account, not T&P's account. In fact, lADE's check register
shows that it paid $266,660 directly to KMEX TV. At the same time, lADE paid
T&P $262,920, ostensibly for the placement of advertising. If lADE paid KMEX di-
rectly for its advertising during that time period, then the Staff questions what the
payments to T&P were for.
The payments to Mercedes Benz and BMW Credit Corporation represent pay-
ments on leases of vehicles which were used personally by the Stofenmachers. A
copy of the lease between Nick Alexander Imports and lADE shows lADE leasing
a BMW 325IC convertible at a total lease price of $31,080.60. The lease appears to
be signed on behalf of lADE by Bemardo Stofenmacher. Most noteworthy is that
Mr. Stofenmacher check the box on the lease listing his intended use of the vehicle
as "personal, family or household purposes."
Also of note among lADE's payments is the $2,541.50 paid from the school's ac-
count for child support payments. From what the Staff has been able to determine,
these payments were made to satisfy child support personally owed by Sergio
Stofenmacher. Of course, the largest amount of checks during this time period, both
in terms of number of checks and total dollar value, is the 100 checks totalling al-
most $1.5 million made out to LADE. The Staff's review shows that these checks
were written on a number of different LADE accounts and were endorsed and cashed
by various of the members of the Stofenmacher family, much as one would write
out a personal check for cash. The Staff was unable to trace where any of this
money went. This pattern of check writing, though, was significant; in one 3 month
period in 1992, over 800 checks, totalling $4.5 million were made out to lADE and
endorsed by one of the Stofenmachers.
A number of checks were also written out in the names of the individual
Stofenmachers. Given that each of the Stofenmachers was a paid officer of lADE,
the fact that there are checks made out to them should not in and of itself be un-
usual. Even assuming that these checks represent salary payments, though, some
anomalies still appear. Each of the Stofenmachers received a substantial salary —
Abraham received $146,640; Bemardo and Alejandro received $200,000; and Sergio
received $220,000. If one assumes that the checks are for salary, then the amount
paid to Bernardo and Alejandro over this period of 6 months represents 42 percent
and 46 percent respectively of their yearly salary. The payments to Abraham, how-
ever, represent only 5 percent of his salary; while the payments to Sergio represent
73 percent of his salary.
78
In addition to their salaries, at least some of the Stofenmachers also received in-
terest free loans from lADE. lADE's financial statement for the period ending Janu-
ary 31, 1992 lists $144,395 in advances to officers. A note to the financial statement
explains that this amount represents non-interest bearing loans to lADE officers;
however, the note does not list which officers received the loans. lADE's only offi-
cers, though, are the four Stofenmachers. By the time of the following year's finan-
cial statement, that is for the period ending January 31, 1993, the figure for officer
advances had ballooned to $379,833. Following this statement, though, some inter-
esting changes occur in this figure. Just eleven months later, lADE issued a finan-
cial statement covering the period ending December 31, 1993. In this statement the
figure for officer advances is suddenly down to $47,377. A review of lADE's general
ledger, however, reflects no repayments by any company officer, nor was any other
evidence found of such repayment. One month later, lADE again issued a financial
statement, this one for the period ending January 31, 1994. In this statement the
figure for officer advances, which only the month before had been less than $50,000,
was now almost $200,000.
The Staff was unable to ascertain what these loans were used for; however, we
would note that each of the Stofenmachers owned residences in the Los Angeles
area with mortgages of over half a million dollars. Sergio Stofenmacher, in addition
to his Los Angeles residence, also owned a resort home in Lake Arrowhead with a
mortgage of $200,000. The Staff" also notes that Abraham Stofenmacher, along with
his wife Ruth, controlled a partnership during this time called the 121 South Canon
Drive Partnership. Among the assets of this partnership was a piece of property lo-
cated at 301 N. Foothill Road in Beverly Hills. Partnership documents show capital
contributions to the partnership of $241,655 in 1993, a significant contribution given
the fact that Abraham's annual salary amounted to less than $150,000.
The mysterious rise and fall and rise again of the figure for officer advances is
perhaps symptomatic of larger problems with respect to lADE's financial account-
ing. According to a former lADE employee, serious problems concerning lADE's fi-
nancial statements came to light during a 1992 reaccreditation visit by ACCET.
Specifically, ACCET had questioned a large sum of money that had been written
off as a loss by lADE. This write-off supposedly covered bad debts from students
who had attended lADE and had not paid what they owed the school.
The members of the accrediting team, however, found that lADE was extremely
behind in its accounting. One of the team members, Mike Gould, subsequently told
the Staff" that lADE's accounting practices were so poor that he didn't think that
the school would even have known if it had bad debts. He stated that lADE hadn't
posted drops or withdrawals, that the school didn't know which grant went with
which student, and that it was behind over $160,000 in its payroll taxes. Mr. Gould
told the Staff" that it became clear to him after talking to lADE's comptroller at the
time that lADE couldn't create an accurate financial statement. Indeed, Mr. Gould
was of the opinion that lADE "did not have a clue" as to what their financial status
was and that, as a result, it was just making up its financial statements. If this
is true, it certainly has serious implications, not only for lADE's ability to provide
an accurate picture of its financial condition, but also for its ability to account for
the millions upon millions of federal taxpayer dollars which the school received over
the years.
Failures of the Regulatory Triad
The participation of institutions in federal student financial assistance programs
is subject to a regulatory triad consisting of State licensing authorities, independent
accrediting agencies, and the federal Department of Education. Each of these enti-
ties is responsible not only for making determinations affecting entry into the pro-
grams (a process known as gatekeeping), but also for conducting continuing over-
sight to ensure that a participating institution remains in compliance with applica-
ble program requirements.
Over the years the Subcommittee has been quite critical of the ability of this regu-
latory triad to prevent fraudulent institutions from gaining access to the program
in the first instance or to subsequently detect and pursue fraud by such institutions
once access had been gained. Unfortunately, the case of lADE represents one more
example of the failure of this system.
From the time it first entered the federal student financial assistance program in
1989, until the time it closed its doors and filed for bankruptcy in 1995, lADE un-
derwent over a dozen audits, examinations, and reviews by the California Council
for Private Postsecondary and Vocational Education, the Accrediting Council for
Continuing Education and Training, and the Department of Education. Each of
these audits, examinations, or reviews found problems of varying degrees in one as-
79
pect or another of lADE's operations. At various times lADE was found to owe the
federal government money for student financial assistance funds it should not have
used; twice lADE was placed on reimbursement for brief periods of time and once
there was even some consideration given to terminating LADE from the program.
None of the members of the triad, though, ever seemed capable of understanding
the full extent of the abuse going on at lADE. As a result, lADE managed to retain
its access to federal funding with little or no serious impairment of its activities
until earlier this year, when an unannounced site visit by its accrediting agency
based on an anonymous tip led to the termination of lADE's accreditation. By that
time, however, lADE had taken in almost $58 million in federal student financial
assistance funds.
1. Gatekeeping Process Failed to Detect LADE's Manipulations
On September 6, 1989 LADE American Schools was certified by the Department
of Education as eligible to participate in the federal guaranteed student loan pro-
gram and the federal Pell Grant program. The certification aud eligibility process
represented one of the first chances available to the regulatory triad to examine
lADE's operations and to prevent the possibility of a potentially abusive institution
gaining access to federal funds. Unfortunately, the gate was opened for lADE at this
stage, despite application documents which on their face should have raised ques-
tions about lADE's eligibility.
Under the Higher Education Act and regulations promulgated pursuant thereto,
a proprietary school must meet certain minimum program length requirements in
order to participate in various of the federal government's student assistance pro-
grams. As the law stood at the time of LADE's application, short term programs of
300 to 600 clock hours were considered eligible only for participation in the guaran-
teed student loan programs. Programs of 600 clock hours or more were considered
eligible for participation in other federal financial assistance programs such as the
Pell Grant program and the College Work Study program. Programs of less than
300 clock hours were considered ineligible for any federal financial assistance pro-
gram.
On its application for initial certification LADE listed the various courses it offered
at each of its campuses. Most of the campuses offered similar programs as illus-
trated by the following listing for LADE's main campus at South Gate:
Name ot Program ^lock
Electrician Residential installer 100
Electrician Residential, Commercial & Industrial 600
Automobile Electricity and Diagnosis Technician 400
Automobile Electricity, Diagnosis & Brakes Technician 500
Automobile Electricity, Tune-Up & Brakes Technician 700
Gasoline Engine Specialist 180
Tune-Up Specialist 180
Computerized Office Systems Specialist 600
Electronics/Computer Technology 400
Electronics & Assembly Technology 300
Electronics Technology 180
Refrigeration and Air Conditioning Service 160
Microcomputer Systems Operator 310
Of the programs listed, only three met the minimum program length requirements
for participation in the Pell Grant program. Five programs met the requirements
for participation in guaranteed student loan programs only. Another five, however,
did not meet the minimum length requirements for participation in any program.
To its credit, the Department, in its Notice of Institutional Eligibility, did limit
lADE's eligibility to those eight educational programs which were over 300 clock
hours; however, in both the Notice and the subsequent Program Participation
Agreement no distinction was drawn as to which of the approved educational
courses were eligible for which type of assistance. According to a senior level De-
partment employee, the Department at that time lefl it up to the institutions to po-
lice themselves in order to make sure that they were applying the appropriate fi-
nancial assistance funds to their various programs.
A few months after the Department had granted its initial certification, lADE re-
applied for certification on the basis of a change in its course measurement methods
from clock hours to credit hours. In the process of making this new application,
80
lADE dropped five of the previously eight certified programs, including four of the
programs which had not been eligible for Pell Grant participation. Of the three pro-
grams remaining from the initial certification, two had met the requirements for
Pell Grant participation and one had not. lADE's change from clock hour to credit
hour resulted in this one program now becoming eligible for Pell Grants as well.
lADE's application also added a totally new educational program for a Security Li-
censed Officer, which under lADE's credit hour conversion method also met the re-
quirements for Pell Grant participation.
Despite this wholesale change in lADE's course offerings only months after receiv-
ing its initial certification, the effect of which was to drop educational programs
which did not qualify for Pell Grants and to ensure the eligibility of those remaining
programs, no flags were raised within the Department of Education. The Depart-
ment granted lADE certification for its revised programs and the school thus had
complete access to Pell Grant funding.
2. Institutional Monitoring Failed to Gauge the Full Extent of IADE's
Abuses
While participating in federal student financial assistance programs, lADE was
subject to continuing institutional monitoring by its State licensing authority, its
independent accrediting agency, and the Department of Education. Any one of these
arms of the triad could have taken action against lADE which would have led to
the school's no longer being eligible to obtain federal dollars. Unfortunately, none
of them seemed capable of taking swift, sure, and effective action to stop the ongo-
ing abuses at lADE.
a. Despite State Findings of Non-Compliance, lADE Escaped Sanctions for Over a
Year and a Half
In order to participate in Title IV programs, an institution must be licensed or
otherwise legally authorized to provide a course of postsecondary education by the
appropriate agency in the State in which it is located. IADE's main campus was li-
censed by the California Council for Private Postsecondary and Vocational Edu-
cation (the "CPPVE") on September 12, 1983. Additional campuses were licensed in
1986.
The CPPVE's first substantive audit of IADE's operations took place in May 1993.
This audit was initiated to determine IADE's compliance with applicable laws and
regulations pertinent to the administration of the school's English as a Second Lan-
guage ("ESL") programs. In the course of conducting this ESL audit, however, the
CPPVE also made significant findings and observations in other areas as well.
The CPPVE audit report was not issued until September 8, 1993, almost 5
months after the audit was conducted. That report listed nine areas in which the
CPPVE found lADE had failed to comply with California and/or federal laws and
regulations. Among the major findings were:
— ten ESL instructors lacked required Certificates of Authorization and five
financial aid staff members had failed to attend required financial aid
training;
— the certification required prior to Pell Grant disbursement to document
students' prior knowledge, skills, and training was not adequate; and
— certain pre-enrollment appraisal examinations were not graded correctly,
resulting in over-charges of Pell Grant funds.
Along with each finding of non-compliance the audit report listed the action re-
quired to bring the school into compliance.
lADE response to the audit report came a month later in a letter to the CPPVE
dated October 15, 1993. For the most part, lADE accepted the CPPVE's findings and
agreed to undertake the required corrective actions. The one major area with which
lADE disagreed was the CPPVE's finding regarding the documentation of ESL stu-
dents' prior knowledge, skills and training. lADE claimed that the State's standard
for documentation in this area was more stringent than the federal standard and
that imposition of such a standard was premature in light of an ongoing task force
which was examining the issue. lADE therefore did not comply with the CPPVE's
audit requirement that it perform a portfolio review of students enrolled after Janu-
ary 1, 1993 to determine whether adequate documentation existed of prior knowl-
edge, skills, and training.
It took another month for the CPPVE to respond to IADE's response. In a letter
to lADE dated November 11, 1993, the CPPVE found IADE's response to this issue
unacceptable. The school was again instructed to perform the review and was pro-
vided with a list of criteria specifying the exact oocumentation the CPPVE would
81
find acceptable. If such documentation could not be located in a student's file, the
school was to contact the student and collect the required information. lADE was
told that failure to comply would require that the school make a full refund of tui-
tion and fees for any student for whom documentation was lacking. lADE was then
given another thirty days to respond.
lADE continued to hold to its position that it should not have to comply with
State standards which were more stringent than federal standards, and did not per-
form this review. Despite lADE's refusal to comply with its directives, and despite
the fact that a failure to comply with audit findings could form the basis for denial
of licensure, the CPPVE nevertheless granted conditional approval to lADE's ESL
program until June 1994.
The primary condition attached to lADE's approval was that the CPPVE would
conduct a follow-up audit prior to the expiration of the approval. This audit was con-
ducted on May 31, 1994, and an audit report was issued on August 29, 1994. That
audit report once again found that LADE had failed to adequately document prior
knowledge, skills and training. The CPPVE required lADE to refund all tuition and
fees for those students for whom adequate document did not exist and further di-
rected the school to engage the services of an independent certified public account-
ant to attest to the school's compliance with the requirement and the occurrence of
the refund payments.
In addition to the documentation of skills issue, the 1994 audit contained a num-
ber of other significant findings, including:
— a failure to provide financial documents to the audit team, or to provide
them in a timely fashion;
— a failure to satisfy financial responsibility requirements;
— a failure to pay refunds in a timely manner;
— a failure to provide requested information pertaining to refunds;
— the disbursement of Pell Grant funds prior to the processing date of stu-
dents' Electronic Student Aid Reports; and
— the disbursement of Pell Grant funds without confirmation of citizenship
status
On October 3, 1994, lADE requested — and was granted — a sixty day extension to
respond to the findings of this new audit. The school finally did respond on Novem-
ber 23, 1994, nearly 3 months after the date of the audit report. Once again, the
CPPVE found lADE's response to be inadequate, particularly with respect to the is-
sues of inadequate documentation of prior skills, the failure to pay refunds in a
timely manner, the failure to provide documentation requested during the audit,
and the failure to satisfy financial responsibility requirements. On the issue of docu-
mentation of prior skills, lADE failed to follow the CPPVE's directive to engage a
certified public accountant and failed to provide evidence of refund payments. Ap-
parently, the CPPVE had finally decided that it had had enough — it informed lADE
that it intended to pursue administrative action against the school.
By this time, however, it was already January 1995, over a year and a half since
the CPPVE's first audit of LADE had discovered some of these problems. During
that year and a half period lADE drew down over $10 million in Pell Grant funds.
Even the CPPVE's decision to pursue administrative action did not bring swift re-
sults. Apparently, while the CPPVE has independent authority to license schools,
it does not have independent authority to revoke licenses already granted. In order
to do so, the CPPVE is required to refer the matter to the California Attorney Gen-
eral's office. The Attorney General's office would then make a determination wheth-
er to pursue an administrative action seeking revocation. On January 9, 1995, the
CPPVE sent a memorandum to the Attorney General's office referring the lADE
audit issues for administrative action. By the time lADE closed its doors on March
13, 1995, the Attorney General's office had not yet taken any action on that referral.
b. Accrediting Agency Found Indicators of Abuses, But lADE's Deceptions Allowed
It to Maintain Its Accreditation
In addition to being licensed by the State in which it is located, an institution
must also be accredited by an independent accrediting agency approved by the Sec-
retary of Education. lADE was accredited by the Accrediting Council for Continuing
Education and Training ("ACCET") on July 1, 1989 for a period of 3 years.
In July 1992, ACCET conducted a review of LADE's operations in connection with
its consideration of lADE's reaccreditation. That review found a number of areas of
weakness, including the following:
— lADE's business plan was considered "elementary and not well thought
out";
82
— Numerous grade and attendance records had been "whited out" and
changed;
— There was an indication of inconsistent charges being levied for tuition
and fees;
— Student records were found to be inadequate; and
— Placement services were found to be inadequate.
As noted previously in this statement, the problems with lADE's placement services
were of particular concern to the accreditors. The accreditation report noted that
this was one area where lADE was not following the accrediting agency's policies.
As a result, ACCET decided to defer a decision on lADE's reaccreditation, pending
the receipt of additional information from lADE and follow-up visits to all lADE
campuses, until the agency's next regularly scheduled meeting in April 1993.
Prior to the receipt of that information, ACCET received correspondence from the
CPPVE dated August 24, 1992, informing it of a State investigation of certain com-
plaints filed against lADE. ACCET also subsequently received a copy of a Septem-
ber 9, 1992 letter to lADE informing it of the results of the State's investigation.
On the basis of these complaints, ACCET scheduled an unannounced site visit to
lADE. This visit took place in October 1992.
Although the ACCET team did not find substantiation for many of the complaints
filed with the State, it did take note of a number of other problem areas, including
placement, student records and financial aid. With respect to financial aid, the team
found the following:
The tuition appears to be set at a level that given the length of the pro-
grams; [sic] it can be covered exclusively with Pell grants. Students inter-
viewed commented several times that they are going to school free. Several
students expressed frustration and confusion over how they are paying for
school. They stated that they were told to "sign here, put this amount here,
etc." and then the first week of classes they were told what they would be
awarded. They do not understand that they are using two or three Pell
grants, both partial and full, to pay for their education.
In a December 1992 meeting ACCET reviewed the report of this site visit along
with lADE's response to the report and its response to the report of ACCET's pre-
vious reaccreditation site visit. Based on this review, ACCET found that there were
still a number of issues which needed clarification regarding lADE's compliance
with ACCET's standards, policies, and procedures. Among these, as noted in a Janu-
ary 13, 1993 letter to lADE, were:
— The institution did not demonstrate financial stability as evidenced by its
reviewed financial statements for the period ending January 31, 1992,
which reflect a current ratio of less than 1:1 and unpaid refunds. The in-
stitution did not provide a financial recovery plan to explain how the in-
stitution will ensure financial stability as requested in the Commission's
August 21, 1992 letter. Although the institution provided an explanation
of the $557,000 of tuition refunds due, it did not provide any evidence to
demonstrate that the refunds have actually been paid;
— The Commission noted that the institution underwent a compliance audit
by the Inspector General's (IG) office and that the institution had not yet
received a copy of the audit but was willing to supply a copy to ACCET
as soon as it becomes available. Until the results of this audit are avail-
able, full compliance with this standard cannot be determined;
— Although the institution stated that the record cards showing grades and
attendance are in order at the Oxnard branch, it did not provide any evi-
dence to support that statement; therefore, the institution did not dem-
onstrate that attendance records at the Oxnard branch are reliably and
regularly kept;
— While the institution's December 1992 interim report indicated that
"white out" no longer is being used on permanent records and that its
records are accurately maintained, evidence to support these statements
was not provided; and
— The completion and placement data submitted by the institution was not
presented in a manner which allowed for verification of the statistics pro-
vided for the completion and training-related job placements. The institu-
tion appears to be reporting all graduates who are working (regardless
of whether they are working in a related field) as placements. . . .
83
In light of these issues, ACCET determined to continue the deferral of lADE's ac-
creditation until the next ACCET meeting in April 1993. At the same time, however,
ACCET directed lADE to show cause as to why its accreditation should not be with-
drawn.
Had lADE's accreditation been withdrawn, it would no longer have met the re-
quirements to be an eligible institution for purposes of participation in Title IV pro-
grams. Once again, however, lADE managed to dodge a potentially fatal bullet.
LADE's response to the show-cause directive apparently was convincing enough to
lead ACCET to believe that the school was instituting the changes necessary to
bring it into compliance with ACCET standards. In addition, an ACCET follow-up
visit in March 1993 found much improvement in a number of previous problem
areas. In describing these improvements, the follow-up report used such terms as
"dramatic turnaround," "significant effort," and "noticeable changes." The report
concluded with the following statement:
The team was able to verify and observe many noticeable, positive changes
made at each of the lADE campuses. Management concurred with the team
that the changes made as a result of efforts of the visitation teams, the Ac-
crediting Commission, the school's staff, and the corporate staff has [sic]
had a very positive result on the entire operation.
On the basis of lADE's response and the follow-up report, ACCET determined at
its April 1993 meeting to vacate the show cause directive and grant lADE
reaccreditation; however, due to the outstanding issue of the Inspector General
audit and other areas of minor concern, the reaccreditation granted was for a 3 year
period rather than the maximum 5 year period. This determination was commu-
nicated to lADE in a letter from ACCET dated May 12, 1993.
Of course, what ACCET did not know in vacating its show-cause directive was
that much of what its site visit team had observed at lADE was a sham designed
specifically for the purpose of deceiving ACCET into believing that lADE was in
compliance with the accrediting agency's standards. The Staff has previously cited
many of the ways in which IM)E carried out this sham, including directing staff
members to pose as employers in order to boost placement statistics, listing the
names of bankrupt companies on students' placement records, briefing instructors
on what to say to the accrediting team members, and preparing new curricula and
bringing in new equipment and supplies for purposes of the site visit. Nevertheless,
lADE managed to retain its accreditation, and with it a continued access to federal
student financial assistance funds.
Over the following year and a half lADE was required to submit quarterly finan-
cial reports to ACCET. In addition, ACCET conducted a special review and required
additional information from LADE in response to the CPPVE's 1993 report on
lADE's ESL program. lADE's responses to these requests were all deemed accept-
able by ACCET and no further action was taken.
On January 26, 1995, ACCET received an anonymous letter alleging "discrep-
ancies in the operating procedures" of LADE. The letter hinted at issues of no-show
students, inadequate documentation of prior skills, financial instability, and failure
to pay refunds on time. ACCET officials viewed this letter as an "urgent complaint"
and scheduled an unannounced site visit to LADE. This visit took place on February
3, 1995.
The visit uncovered a number of serious problems, including the following which
were detailed in an evaluation team report:
— Management did not demonstrate that internal and external governance
is effective. This is evidenced by lack of key and pertinent student files
on site, the inability of the corporate structure to provide documentation
of these files that they State were located at the corporate office, and the
institution's failure to respond to CPPVE's request for key information,
even after a 60-day extension;
— Management did not demonstrate that the role of management is clearly
defined, effective, and efficient. This was evidenced by severe weaknesses
in the administration of financial aid at the corporate office and by slow
and sometimes no response in providing key files to the visiting team
under the direction of the corporate office. . . .The campus does not have
accurate and accessible information on site to prove that financial aid
records are accurately and appropriately administered, that refunds are
made in a timely manner, and that payroll taxes, lease payments and
rent are up to date;
— The institution did not demonstrate a record of responsible financial man-
agement with income sufficient to maintain the educational program.
84
. . . This was further evidenced by Corporate Counsel's own statements
that lADE was experiencing a cash flow problem that made it impossible
to provide a paycheck to their contracted testing personnel which amount
[sic] to $750.00 even though lADE is a "$16,000,000 annual income orga-
nization". . . .;
— The institution did not demonstrate that financial aid programs are capa-
bly administered, accurately recorded and documented, and appropriately
implemented. The institution did not demonstrate that State and federal
requirements are met in the recruiting, awarding, and documentation of
financial aid programs. This was demonstrated by a review of 26 students
records which did not provide evidence of refund calculations and pay-
ments, that satisfactory student progress was appropriately evaluated,
and in three cases, that students who received Pell were even enrolled
or attended classes; and
— The institution did not demonstrate that tuition refunded and received
were clearly documented, and that cancellation and refund policies com-
ply with federal and State regulations. The institution did not dem-
onstrate that refunds are made within thirty days of determination of the
last date of attendance. This was demonstrated to the team by incomplete
financial aid files, missing files of students who received Pells as verified
by RGM reports, lack of documentation in student files that verifies that
refund calculations were made, and lack of documentation, such as origi-
nal cancelled checks, that could verify that refunds were paid.
On the basis of these findings, ACCET issued lADE a directive on March 2, 1995
to show cause why its accreditation should not be withdrawn.
On the same date lADE transmitted a letter to ACCET over the signature of
Abraham Stofenmacher. This letter represented lADE's "interim response" to some
of the issues raised during the ACCET team's site visit. It is interesting to note that
even at this late date lADE persisted in its attempts to deceive its regulators. The
letter attempted to explain away the problem of no-show students by referring to
"an unusual set of circumstances . . . which inadvertently [emphasis in original) re-
sulted in a limited number of students who signed enrollment agreements but never
began classes receiving Title IV funds." The letter also referred to an independent
audit which lADE had commissioned to determine how much the school owed in re-
funds. The letter stated that "based on preliminary indications from the auditor we
expect the liability to be approximately $130,000." Ken Williams, lADE's Director
of Financial Aid, subsequently told the Staff that the letter had been written to
imply that this figure represented lADE's total school-wide refund liability, when
in fact this was the refund liability of just one of lADE's seven campuses.
By this point, however, lADE had just about run out of time. Within a week of
its letter to ACCET, lADE had shut its doors. A few days later, it had filed for bank-
ruptcy. In response to these actions, ACCET, in a letter dated March 16, 1995, with-
drew lADE's accreditation. The withdrawal of lADE's accreditation came 2 years
and 2 months after ACCET had issued its first show-cause directive to lADE — in
the intervening time period lADE managed to obtain $34,295,129 in Pell Grant
funds.
c. The Department Should Have Seen Early Warning Signs in lADE's Biennial Audit
Under the Higher Education Act prior to the 1992 amendments, all institutions
participating in Title IV programs were required to undergo a biennial financial and
compliance audit to be conducted by an independent auditor. The results of this
audit were then to be submitted to the Department for review and final audit deter-
mination. In September 1992, lADE submitted to the Department's Office of Inspec-
tor General the report of an audit conducted by Barry Glasser, C.P.A., covering the
period from July 1, 1989 to June 30, 1991. The report also contained lADE's written
response to Mr. Glasser's audit findings. The practice in the Department was to
have the Inspector General staff review and approve or disapprove these audits and
then to send them on to the Department's Audit Resolution Branch for final audit
determination actions.
Of the various findings in Mr. Glasser's report, two in particular stand out. The
first found problems with lADE's administration of Ability to Benefit testing. Based
upon his testing of student files, Mr. Glasser found that approximately 20 percent
01 students admitted to lADE had not attained the recommended minimum passing
score on the test. Mr. Glasser's second major finding was that lADE owed over
$540,000 in refunds as of March 30, 1992. According to his report, the exact cause
for the refunds due was not determined.
85
Perhaps the most telling statements occur in Mr. Glasser's report on internal con-
trols. In that report Mr. Glasser States,
My study and evaluation was more limited than would be necessary to ex-
press an opinion on the internal control systems used in administering the
student financial assistance programs of the Institution. Accordingly, I do
not express an opinion on the internal control system used in administering
the student financial assistance programs of the Institution.
However, my study and evaluation and my audit disclosed the following
conditions [i.e., ATB irregularities and refunds owed] and [sic] I believe re-
sult in more than a relatively low risk that errors or irregularities in
amounts that would be material to the student financial assistance program
may occur and not be detected within a timely f)eriod.
As we know now, Mr. Glasser's report turned out to be all too prophetic.
Unfortunately, little was done within the Department in response to Mr. Glasser's
audit report. The Department's final audit determination letter was sent to lADE
on August 25, 1994, almost 2 years after the date the Department first received Mr.
Glasser's report. The Staff discussed the timeliness of the Department's action with
a former chief of the Audit Resolution Branch. According to this individual, in early
1994 there was a backlog of audits awaiting final determination dating back as far
as 1977. It should be noted that a final determination letter must be issued before
the Department can take any action against an institution based on audit findings.
After taking almost 2 years to issue its determination letter, the determinations
reached by the Department were less than impressive. With respect to the auditor's
finding on Ability to Benefit students, the Department noted that the Regional In-
spector General for Audit had subsequently also issued an audit report discussing
this issue. As a result, the Department decided to postpone final resolution of Mr.
Glasser's finding on this issue until it issued a final determination letter on the In-
spector General's finding on the same issue. That final determination letter was
only issued a little over a month ago.
With respect to the auditor's finding on refunds owed by lADE, the Department
ultimately decided not to sustain this finding. It did so on the basis of lADE's re-
sponse to the finding which claimed that it had satisfied all unpaid refund liabilities
and a subsequent letter from the auditor which stated that he was satisfied with
the school's response. Had the Department looked closely at lADE's response,
though, it might have realized that something was amiss. In support of its claim
that it had satisfied all refund liabilities, LADE submitted a computer generated
document entitled "Refunds Due Report." This report purported to cover the award
years 1988 through 1993 for all campuses. The report lists each category of Title
IV programs and then lists columns for "Due," "Paid," and "Balance." The report
contained zeros in every column for every category. At the bottom of the report was
an entry for "Total of Students with Refunds." This entry also showed all zeros.
While it is true that lADE's response shows zero refunds due, it seems strange,
given the fact that lADE admitted it had identified students for whom refunds ap-
peared to be due and had paid all remaining refunds, that the column for refunds
paid would also be zero. This is especially so because the report covers all award
years going back to lADE's entry into the program. This seemed to have raised no
red flags for the Department, however, as it accepted lADE's response in rendering
its final determination. As is now known, of course, lADE in fact owed millions of
dollars in refunds and, according to an internal memorandum, it would post its own
refunds without ever making the necessary deposits. In the words of that memoran-
dum, this enabled the school to "quickly 'fix' things during an audit."
This was not the only discrepancy with respect to the refund issue which the De-
partment should have caught. In Mr. Glasser's report he provides a table showing
the sample sizes of students in various categories selected for testing in accordance
with the Department's Audit Guide. Under the category for refund calculation, Mr.
Glasser states that the lADE was unable to provide him with the population. Never-
theless, his report shows a sample size of 24 students. According to the former Chief
of the Audit Resolution Branch, someone within the Department should have asked
how an auditor can obtain a sample from an unknown population. Perhaps more
importantly, someone should have questioned why the school was unable to provide
the population in the first instance.
By the time the Department issued its final audit determination letter on the
1992 audit submission in August 1994, LADE's next audit was already due. This
audit had come due in March 1994. LADE, however, never submitted that audit re-
port. Indeed, to this day that report has never been submitted. Despite the fact that
lADE continued to operate for another year aft«r failing to submit this report, the
86
Staff notes that no action was ever taken against the school for this compUance fail-
ure.
d. The Department Ignored Indicators of Fraud and Abuse and Mishandled the Op-
portunity to Shut lADE Down in 1992
Perhaps most disturbing of the various missed opportunities in this case is the
fact that the Department of Education, despite having three separate teams examin-
ing lADE in 1992, either failed to comprehend or ignored indicators of the ongoing
abuses at lADE. Had the Department taken aggressive action in response to these
indicators, it might have saved tens of millions of taxpayer dollars. Instead, a review
of the Department's actions reveals a tentativeness which ultimately led to the De-
partment's letting lADE continue its activities with virtual impunity.
The Department's first review of lADE commenced in March 1992. This review
consisted of an audit conducted by a team from the Inspector General's Office of
Audit and lasted from March 2, 1992 until November 9, 1992. The objectives of this
audit were to determine: "1) whether [lADE] American Schools' programs were eligi-
ble for SFA funds and 2) whether it had operated the SFA programs in accordance
with Federal laws and regulations." According to the Assistant Inspector General
for Audit, lADE had been selected for this audit because of its recent large increases
in Pell Grant drawdowns.
Early on in the audit, the audit team began to receive allegations of potential
fraud and abuse related to lADE's participation in Title IV programs from former
students, employees and others. Joe Tong, one of the primary auditors conducting
this audit for the Inspector General, interviewed Jorge Meza, the former Director
of lADE's Los Angeles campus. Mr. Meza stated in this interview that he had par-
ticipated in falsifying student grades at the direction of Sergio Stofenmacher so that
lADE could show the satisfactory progress of its students necessary to ensure the
continued flow of Title IV funds. In addition Mr. Meza stated that lADE had altered
Ability to Benefit test responses to make students eligible for financial assistance
and had falsified its student placement statistics to meet federal requirements. Fi-
nally, Mr. Meza informed Mr. Tong that lADE had been "fixing" student records
since being notified of the impending audit in February.
Mr. Tong also interviewed Jean Herzog, a senior auditor with Barry Glasser, the
certified public accountant who at the time was performing an independent biennial
audit of lADE. Ms. Herzog stated in her interview that she had received a complaint
that lADE was not making refunds. She said that she had received a Refund Due
report which showed that lADE owed over $500,000 for some 700 students. Ms.
Herzog also expressed concerned about the slow pace with which lADE was re-
sponding to her requests for files pertaining to refunds. Mr. Tong mentioned to Ms.
Herzog that lADE was slow in producing files for the Inspector General audit as
well. He later speculated in his interview write-up that perhaps lADE was screen-
ing the files prior to providing them.
In addition to his interviews, Mr. Tong's review of lADE files and documentation
uncovered what appeared to him to be indicators of possible fraud and abuse. Mr.
Tong found tests in students' files in which it was clear that the students' signature
had been forged. In one example Mr. Tong found a test in the records of a student
named Martha in which the first name was misspelled. He also found tests with
no answers which were nevertheless given grades of "A," and answer sheets with
different answers for the same question, neither of which was marked wrong.
Mr. Tong documented all of these problems in his audit workpapers and sent a
report of his findings to his supervisor, James Okura. Mr. Okura apparently decided
that these were not issues of concern for the purposes of the audit despite the fact
that one of the stated objectives of the audit was to determine whether lADE was
operating student financial assistance programs in accordance with federal laws and
regulations. Indeed, as late as April of this year, in a meeting with Mr. Okura and
others to review his workpapers in light of this Subcommittee's investigation, Mr.
Tong was told that the falsification of satisfactory academic progress and the other
irregularities he had uncovered were not important because lADE "would have got-
ten the Pell Funds anyway."
Despite his supervisor's failure to see the significance of his discoveries, Mr. Tong
contacted the office of the Regional Inspector General for Investigations. According
to staff from the Inspector General's Office of Investigations, it was a letter from
Mr. Tong that led them to initiate an investigation of lADE. This investigation,
which began with a re-interview of Mr. Meza in March 1992, overlapped the time
period during which the Inspector General's audit was ongoing. Meanwhile, the
audit was focusing in on just two issues — lADE's grading of Ability to Benefit tests
to qualify students and lADE's maintenance of Pell Grant cash balances in excess
of federal regulations.
87
The Inspector General investigation consisted of nine interviews with former em-
ployees and students of lADE conducted from March through August 1992. During
those interviews the investigators were told of low grades that were whited out and
replaced with passing grades; answers that were given to students taking Ability
to Benefit tests; documents that were created indicating students passing tests for
course they had never taken; tests that were falsified; course assignments that were
manipulated in order to maximize Pell Grant awards; text books in English that
were given to students for courses taught in Spanish; and placement statistics that
were falsified. One former instructor even told the investigators that he had heard
that lADE's owners intended to make as much money as they could in one or 2
years and then sell the school.
These allegations apparently were taken seriously. According to an internal De-
partment of Education chronology prepared by Daniel Dietz, Acting Chief of the In-
stitutional Review Branch, on September 23, 1992, the Office of Inspector General
indicated to the Department's Region IX office that it intended to ask the Depart-
ment's Compliance and Enforcement Division to initiate termination action against
lADE. Another internal chronology, prepared by Benito Botello, Acting Regional Di-
rector for Region IX, lists an entry for the same date in which it indicates that
"prosecution action" would be sought. Whether this reference to prosecution referred
to the termination proceeding or to a possible criminal prosecution is not clear.
In response to the stated intention of the Inspector General, the Region DC office
asked the Compliance and Enforcement Division to place lADE on reimbursement.
Again there is some confusion between the two chronologies, with the Dietz chro-
nology indicating that the request took place on September 23, 1992 and the Botello
chronology indicating that the request took place on September 28, 1992.
The Botello chronology states that the reason given for placing lADE on reim-
bursement was the receipt of student complaints by the CPPVE. These complaints
dealt mainly with quality of education and problems with lADE's facilities and Mr.
Botello admitted that "the region had to stretch this to cover the possibility of finan-
cial aid complaints."
Apparently, however, there was some concern within the Department about using
this pretext to place lADE on reimbursement. The entry for September 28, 1992 in
the Botello chronology states:
It had been decided between Region IX and the Branch Chief for Region
X, Rockefeller, that to place the school on reimbursement without inves-
tigating the problem would appear unfair, so a program review was planned
to obtain first hand documentation. Rockefeller, Frank Dvorak, reviewer
from Region X and David Hinojosa, reviewer from Region DC were in agree-
ment that the reason for the reimbursement was weak and OIG-Audit had
not shared any of the information of their findings with anyone from our
offices.
Why the allegations received by the Inspector General investigators were not
deemed sufficient in and of themselves to justify placing lADE on reimbursement
is not clear. For some reason the Department decided they needed to come up with
some after-the-fact support for their action.
The program review lasted a total of 5 days. During those 5 days the reviewers
examined just twenty-two files for the award years 1990-1991 and 1991-1992. The
reviewers did not focus on the allegations which had been received by the Inspector
General investigators; rather they appeared to concentrate on the same issues the
Inspector General auditors had concentrated on — improper determinations under
Ability to Benefit testing and maintenance of excess Pell Grant cash balances. There
view concluded that in fact such improper determinations had been made and that
in fact lADE had maintained excess cash balances. In addition, the review found
that lADE had a problem with late refunds.
According to the Botello chronology, though, these findings were considered
"minor." The chronology then includes some troubled musing, stating:
Why more serious [findings] weren't found could probably be best answered
by the lead reviewer. This question was asked of Mr. Hinojosa upon his re-
turn, and his response was that he was following the lead and directions
of Mr. Dvorak.
Even though the reviewers did not consider their findings particularly serious,
lADE was still kept on reimbursement because of the Inspector General's supposed
intention to pursue termination or other serious action against the school.
The Department soon felt itself hard pressed to maintain this position. The
Botello chronology contains the following entry for the period October-December
1992:
88
During this time period the IRBC [Institutional Review Branch Chief! for
Region IX, Botello, spoke with OKURA several times regarding the issu-
ance of the audit report. Botello advised Okura that the program review
findings were not serious enough to keep them on reimbursement while
waiting for the IG report. IRB was advised first that the report would be
issued the first week of November. Later it was changed to the middle of
November and then changed to the beginning of December. In the mean-
time, Ken Williams, the Financial Aid Director of lADE was calling almost
daily making an argument that the complaint with the students had been
addressed and the issues on the program review had also been addressed
and that there was no reason to keep the school on reimbursement. Still
we kept the school on reimbursement from September to December.
At the end of November the Region issued its program review report with its find-
ings on the Ability to Benefit testing issue, the excess cash issue and the refund
issue. A week later lADE submitted its response to the program review. A few days
after lADE's response was received, the Inspector General apparently decided not
to pursue an action against lADE. According to the Dietz chronology, on December
8, 1992 the Inspector General decided not to press for termination. As a result, the
Compliance and Enforcement Division removed lADE from reimbursement. The
Botello chronology places the date of this action on December 10, 1992, stating in
its entry that:
Okura advised that they would not be pursuing prosecution action at that
time. Region IX was left with a reimbursement case with no strong support-
ing evidence. All during this time, OIGA had not released any information
on their findings.
In fact, the Inspector General did not release the report of its audit until Septem-
ber 1993, a year and a half aft;er the audit was first begun and a year after it had
first asked the Department to place lADE on reimbursement because of its intention
to seek the a school's termination. When the audit report finally was issued, its find-
ings practically mirrored those of the program review issued ten months previously.
The Inspector General did no better with the report of its investigation. Despite
the fact that the last substantive interview was completed in August 1992, the In-
spector General did not issue a report on its investigation until July 1993, almost
a full year later. The entire investigation report consists of one and a half pages.
What is said in those one and a half pages, though is rather perplexing. The report,
written by Special Agent Robert Gonzalez, states:
An investigation was initiated in April 1992 based upon an interview of
Jorge Meja [sic], former lADE school director. The interview was conducted
by an OIG auditor, Joe Tong and Eulalie Young of the State licensing au-
thority. Meja [sic] stated that lADE, Dviolated its academic progress policy
by not reflecting failing grades; 2) helps students pass ATB tests; and 3)
is not accurately reporting its job placement rates.
IS interviewed Jorge Meja [sic], two other former lADE instructors, Ignacio
Rosas, Sergio Castro, and former employee Edgardo Rivas. In addition, var-
ious students were also interviewed. The interviews revealed a pattern of
abusive tactics in recruiting and ATB testing designed to obtain maximum
enrollments.
The interviewees reported a pattern of academic progress abuse by allowing
"employability factors" such as appearance and attitude be taken into ac-
count when grading students. Tnis very subjective technique was recog-
nized by ACCET and did not affect the schools' accreditation. Also, the
interviewees confirmed that LADE management pushed staff to enroll as
many students as possible and to report student progress electronically so
lADE could earn SFA payments as quickly as possible.
However, no person interviewed, including the original complainant, made
a credible allegation of criminal wrongdoing. Further, a credibility gap in
J the objectivity of the former school employees was evident to the interview-
ers due to the circumstances of their separation from lADE.
The Staff finds it troubling that Mr. Gonzalez chose to characterize the abuse of aca-
demic progress standards as consisting of "allowing 'employability factors' such as
appearance and attitude to be taken into account when grading students." Of the
nine interviews conducted by the Inspector General investigators, only one individ-
ual mentioned anything close to this. According to the investigators' interview re-
ports, Sergio Castro, a former instructor, said that "a portion of the grade that was
named 'shop and employability' was very subjective." Mr. Castro stated that "it was
89
determined by the student's knowledge and also by their appearance." Nowhere in
the report of Mr. Castro's interview is there any mention of his stating that this
procedure had been approved by ACCET; nor is there any evidence of ACCET rep-
resentatives having been interviewed.
Of additional concern is that Mr. Gonzalez left out of his report the allegations
made by Mr. Castro, and each of the other instructors interviewed, concerning the
falsification of grades, tests, and student records. Mr. Gonzalez also seemed to em-
phasize that the abuses revealed were designed to maximize enrollment, while ig-
noring the clear statements of the interviewees that this activity was designed to
maximize Pell Grant funding.
Perhaps most disturbing, though, is Mr. Gonzalez' statement that "no person
interviewed, including the original complainant, made a credible allegation of crimi-
nal wrongdoing." It is not clear to the Staff why allegations of falsification of stu-
dent records designed to allow a school to collect federal financial assistance for an
otherwise ineligible student does not rise to the level of criminal wrongdoing. Nor
is it clear to the Staff why the Inspector General investigators did not pursue the
leads offered to them in their initial interviews to determine whether these allega-
tions were credible. Mr. Meza, Mr. Castro, and Mr. Rivas all provided the investiga-
tors names of other lADE employees who either knew of or were involved in poten-
tially fraudulent activities. There is no record that the investigators ever inter-
viewed these people. Nor did the investigators ever interview Ken Williams. lADE's
Corporate Director of Financial Aid, or any of the Stofenmachers.
The Gonzalez report concludes with the following paragraph:
Discussions with Jim Okura, GIG Audit Supervisor in charge of the lADE
audit, lead to the conclusion that this case be administratively closed. The
audit concentrated on: 1) abuse in converting clock hours to semester credit
hours, 2) abuse in administering the ATB tests by using a lower cut off
score and, 3) lADE maintained cash in excess of a 3 day supply. Okura
agreed that the evidence would not support a successful criminal prosecu-
tion since most complaints consisted of quality of education, lack of edu-
cational material and inadequate equipment issues. The other initial allega-
tions lacked materiality or were not viable since many students did attend
and complete the course.
The Staff does not understand why the Inspector General's Office of Investigation
would confer with someone from the Office of Audit as to a decision on whether to
close an investigation. Nor does the Staff understand why the findings of the audit
are relevant to such a decision. Moreover, the statement that the evidence would
not support a criminal prosecution because it consisted mainly of quality of edu-
cation issues ignores the most damning allegations received by the investigators.
The Staff finds the investigators' reliance on Mr. Okura's concurrence particularly
interesting, especially in light of statements made by Mr. Okura as recently as 3
months ago (well after the U.S. Attorney in Los Angeles had opened a criminal in-
vestigation and the FBI had raided lADE's offices) that the academic progress prob-
lems and other irregularities first uncovered by Joe Tong were not important be-
cause "lADE would have gotten the Pell Grant funds anyway."
The opinion of Mr. Okura and the tone of the CJonzalez report seem in conflict
with the initial intention of the Inspector General's office in September 1992, to seek
the termination and/or prosecution of lADE. It is apparent from the Department
chronologies that by December 1992 the Inspector General's office had changed its
mind. The Gonzalez report obviously reflects that changed mindset. What exactly
led to this change, however, is not clear, particularly since the Inspector General's
investigation had uncovered what would seem to be clear indicators of program
fraud and abuse.
Once the Inspector General's reports had been issued, there was very little addi-
tional activity within the Department concerning lADE. The Department was re-
quired to issue a final audit determination letter on the Inspector General's audit
report; however, by mid-1994 the letter had still not issued. As a result, lADE had
managed to escape reimbursement, escape termination or prosecution, and return
to business as usual. Things suddenly seemed to change, though, once this Sub-
committee began its investigation.
The Subcommittee's investigation of lADE began in early April 1994. On approxi-
mately April 12, 1994, the Staff spoke with regional Department officials about
lADE and its sharp increase in Pell Grant funding. At that time the Staff requested
and was furnished with copies of the Inspector General's Final Audit Report, the
Department's Program Review Report, and the CPPVE's Compliance Audit. During
the week of May 8-13, 1994, the Staff conducted a field investigation in Los Ange-
les, reviewing documents and interviewing Inspector General representatives, Cali-
92-498 96-4
90
fornia State officials, and current and former officers, employees and student of
lADE. During that same time period, the Staff served lADE with a subpoena re-
questing various categories of documents pertaining to the school's participation in
the Pell Grant program. As knowledge of the Staffs visit spread, the Staff began
receiving unsolicited contacts from individuals offering to provide information about
lADE.
On May 17, 1994, only 4 days after the Staff had concluded its trip to Los Ange-
les, the Department's Region X office recommended that lADE once again be placed
on reimbursement. According to the Botello chronology, the reason for this rec-
ommendation was the Inspector General's audit and the Department's program re-
view findings.
The Staff finds it odd that the program review and the Inspector General's audit
should have formed the basis for placing lADE on reimbursement at this point. The
findings of this same program review, which was by that time over a year and a
half old, were considered too minor by the Department to support placing lADE on
reimbursement back in 1992; moreover, the findings of the Inspector General's
audit, which had been issued ten months previously, mirrored the findings of the
program review.
Equally odd is another internal Department document which states:
... it appears that the school's being placed on reimbursement in mid-May
may have been based, not on a program review or an OIG audit, but on
an independent SFA audit. However, the file shows conflicting reasons why
lADE has been placed on reimbursement . . . because of a program review,
because of an OIG audit, because of an independent SFA audit.
Perhaps most revealing of the Department's sudden renewed interest in lADE
was a phone conversation the Staff had with Frank Dvorak of the Department's Re-
gion IX office on May 23, 1994. Mr. Dvorak told the Staff at that time that the De-
partment had put lADE back on reimbursement because of concerns over the unre-
solved findings of the Inspector General audit. Mr. Dvorak then freely admitted that
the decision was made at that time because of the involvement of this Subcommittee
in investigating lADE. He stated that the Department was waiting to see what type
of response they would receive from lADE and that he did not think the school
would be on reimbursement very long. He further stated that if lADE were taken
off reimbursement, they could be placed back on in the future based on the results
of the Subcommittee's investigation.
On June 29, 1994, lADE was once again taken off reimbursement. This time, how-
ever, it appears that the action was taken against the wishes of the Department's
program offices. From internal Department documents and interviews with Depart-
ment employees it appears that the Department's Office of General Counsel unilat-
erally agreed to a settlement with lADE under which the lADE would be taken off
reimbursement in exchange for its establishing a $500,000 letter of credit in the De-
partment's favor. The General Counsel agreed to this settlement despite the fact
that the audit report on which the reimbursement action had allegedly been based
had found lADE liable for over $1.3 million in improperly disbursed Title IV funds.
The Chief of the Audit Resolution Branch was vehemently opposed to the settle-
ment and wanted to keep lADE on reimbursement until there was a final audit de-
termination. Other offices, including the Regional offices and the Compliance and
Enforcement Division, also opposed a settlement. An internal Department document
related:
5/16/94 — placed on reimbursement again, based on IRE and OIG audit find-
ings (mostly ATE issue; potential $1.3 million liability?). This is the school
that the Nunn Committee took an interest in. Ken Williams, corporate fi-
nancial aid director, vehemently and irritatingly, complains by telephone
and in a series of letters. School offers $500,000 letter of credit against li-
ability if we will take off of reimbursement. No program office wants to ac-
cept offer, but Steve Kraut, OGC, does so unilaterally, despite our protests,
(emphasis in original]
The General Counsel's acceptance of a settlement seems to have been driven by
the fact that lADE had filed for a Temporary Restraining Order against the Depart-
ment's imposition of the reimbursement order. It appears that the General Counsel
was either unwilling to litigate the issue against lADE or afraid of litigating and
losing. It therefore accepted the letter of credit in satisfaction of any liability lADE
might owe under the final audit determination. What is not clear, however, is why
the General Counsel was willing to accept a letter of credit of only $500,000 in satis-
faction of an audit finding of $1.3 million.
91
The Staff recently spoke with Ken Williams, the former Financial Aid Director at
lADE and the driving force behind getting the school removed from reimbursement
in June 1994. The thrust of Mr. Williams' comments were that lADE had managed
to get away with deceiving the Department about its true financial condition. He
admitted to the Staff that in retrospect the Department should not have removed
lADE from reimbursement. According to Mr. Williams, the fact that lADE had prob-
lems with late refunds and was consistently issuing checks for students twenty-one
days in advance of their start dates should have indicated to the Department that
this was a school with a serious cash flow problem.
With respect to refunds, Mr. Williams admitted that prior to the Inspector Gen-
eral audit, lADE had not been making any refunds. Only the threat of the impend-
ing audit forced lADE into clearing the backlog of refunds due. Apparently, the
Stofenmachers calculated that it would be better for an audit to find lADE making
late refunds than for it to find lADE making no refunds at all. Mr. Williams told
the Staff the only reason they were able to get away with this was because the
school had some 3 weeks advance notice of the audit. Mr. Williams suggested that
if the Department conducted unannounced audits and reviews they would "catch a
lot of schools."
Mr. Williams also suggested that the Department conduct unannounced limited-
scope follow-up audits 6 months after an initial finding that a school is making late
refunds. This type of follow, he said, would catch many schools actually making no
refunds. Indeed, Mr. Williams admitted that such a follow-up would have uncovered
that lADE was not making refunds.
Since no such follow-up was undertaken, lADE was able, once again, to return
to business as usual after being removed from reimbursement in June 1994. Things
also appeared to return to business as usual within the Department — no further at-
tention was paid to lADE and a final audit determination letter still had not been
issued. In August 1994, however, lADE once again came to the Department's atten-
tion. On August 24, 1994, the Department's Office of General Counsel received noti-
fication by letter from the Department of Justice that it was looking at lADE as
a possible civil fraud matter. A copy of this letter was also sent to the Counsel to
the Inspector General.
Despite receiving this notification, the Department took no steps at that time to
place lADE back on reimbursement or to otherwise limit its access to federal funds.
In fact, it appears that the General Counsel's office never even informed the Compli-
ance and Enforcement Division about this notification until March 1995, some 6
months after the notification had been received. The Inspector General likewise ap-
pears to have undertaken no immediate response. It did ultimately open an inves-
tigation of lADE, but internal memoranda reveal that this was not done until Feb-
ruary 1995, 5 months after receipt of the Justice notification. During this interven-
ing time period, lADE drew down another $6.6 million in Pell Grant funds.
In late February 1995, the Department received from a former lADE employee
a copy of the Ken Williams memorandum to the Stofenmachers in which lADE's
failure to pay refunds and improper administration of programs was discussed. This
same employee had been cooperating with the Subcommittee for some time pre-
viously and had only recently resigned from lADE. It appears that with this infor-
mation in hand the Department once again decided to place lADE on reimburse-
ment. In doing so, however, the Department did not base its action on this informa-
tion; rather it informed lADE that the action was being taken in response to the
Department's receipt of the January 1995 CPPVE review of the lADE ESL program.
lADE's response to being placed on reimbursement again was to threaten suit
again. In a letter to the Department dated March 6, 1995, the school objected to
the Department taking this action based on what it called the "disputed findings"
of a State program review rather than on the Department's own (still unresolved)
audit findings. Moreover, lADE claimed that the $500,000 letter of credit had been
established to protect the Department's interests pending final resolution of those
findings and that the Department's actions in placing the school back on reimburse-
ment violated the spirit of the original settlement.
Fortunately for the Department's General Counsel, it did not have to worry for
long over whether to settle this matter with lADE. On March 9, 1995, the Depart-
ment learned that lADE had shut down its main campus. On March 10, 1995, the
FBI executed a search warrant of lADE's corporate headquarters in connection with
the Department of Justice's criminal investigation, removing literally truckloads of
documents. Three days later lADE filed for bankruptcy. In light of all this, the De-
partment's Compliance and Enforcement Division, on March 24, 1995, issued an
emergency action and notice of intent to terminate lADE on the basis of the school's
bankruptcy and cessation of instruction.
92
By the time this action had been taken, Abraham Stofenmacher was already back
in Argentina, Alejandro Stofenmacher had purchased a one-way airline ticket for
Argentina, and Sergio Stofenmacher had driven across the border into Mexico
(where he too allegedly boarded a flight for Argentina). More importantly, though,
by the time of its demise in March of this year, lADE had obtained over $64 million
in Title IV funds, including almost $58 million in Pell Grant funds alone.
e. The Mishandling of the lADE Case is Symptomatic of Deeper Problems Within the
Department
For the past 5 years this Subcommittee has been examining the Department's
ability to oversee the operation and management of this nation's federal student fi-
nancial assistance programs. In hearing after hearing, evidence has been presented
documenting problems of mismanagement, incompetence, indifference, lack of re-
sources, lack of training, lack of personnel, and perhaps a lack of will. And time
after time, the Subcommittee has heard from Department officials, under both Re-
publican and Democratic administrations, that they are committed to reforming the
process and improving the integrity of the programs they oversee. Certainly Con-
gress has attempted to help the Department in this regard. The 1992 amendments
to the Higher Education Act gave the Department significant new tools with which
to address issues of institutional integrity and program fraud and abuse.
And, as the Staff noted in the Subcommittee's first hearing on the Pell Grant pro-
gram in 1993, steps were taken within the Department to begin to deal with these
problems. The Office of Student Financial Assistance Programs was reorganized,
leading to the creation of the Institutional Participation and Oversight Service. This
Service, known as "IPOS," was tasked for the first time with coordinating certifi-
cation and eligibility, accreditation and State licensing, and program review and
compliance operations within the Department. Several strong and committed man-
agers were brought in to run the various divisions of the IPOS, and there seemed
to be a renewed outlook by both senior management and mid-level career employees
regarding their charge to ensure the integrity of student aid programs.
Despite the high hopes generated by the Department's new administration, the
Staff must once again report to the Subcommittee about a massive failure on the
part of the Department in carrying out its fiduciary role of ensuring program ac-
countability, a failure which led to over $50 million of taxpayer money going to a
school which was little more than a Pell Grant mill. What is most disturbing, how-
ever, is that the lADE case seems to be symptomatic of the Department's longstand-
ing and continuing failure to accept its fiduciary obligations and to adopt a consist-
ent and aggressive oversight mentality.
It is not the Staffs intention to paint all of the Department's employees with the
same brush. There are many hard-working and earnest employees within all levels
of the Department who are deeply committed to ensuring the integrity of the pro-
grams they administer. The Staff interviewed a number of such employees, all of
them branch or division managers in the IPOS, about their own commitment and
that of the Department. Unfortunately, the feeling among these employees was
unanimous that the Department's approach to enforcement was uneven, inconsist-
ent, and easily susceptible to outside pressures, both institutional and political.
For example, the Staff was told that the statutory requirement that institutions
submit independent audit reports was "a joke" because the Department consistently
had done nothing when an institutions failed to submit such a report. Indeed, as
the Staff has previously reported in this statement, lADE never submitted a report
due in March 1994. Even though the school continued to operate for over a year
after that date, no action was ever taken by the Department in response to this
compliance failure. The audit requirement is something that the Congress obviously
felt was important — in the 1992 amendments the requirement was changed from
one of a biennial audit to one of an annual audit. The Staff was informed, however,
that there are approximately 3100 schools which have not submitted their required
audits, going back in some cases more than 5 years. According to the employees
interviewed by the Staff, until just last year when a new Chief of the Audit Resolu-
tion Branch was hired, no one in the Department had ever taken responsibility for
ensuring that audits are submitted as required.
The resolution of audits has been a longstanding problem for the Department. The
Staff was told by the former Chief of the Audit Resolution Branch, Johan Bos-Beijer,
that when he began his job in February 1994 there were approximately 300 audits
which were overdue and awaiting final determination, some dating back many
years. An audit is considered overdue if it has not been resolved within 6 months
of issuance of the audit findings. The problem of unresolved audits was an area of
such concern that it was included in the Semiannual Report of the Inspector Gen-
93
eral for the period of April 30, 1993-September 30 1993 and the Report for October
1, 1993-March 31, 1994.
From all indications to the Staff, Mr. Bos-Beijer was a dedicated manager who
carried out his duties with a single-minded devotion to improving the operations
and accountability of the Department. Moreover, he was extremely successful — by
August 1994, only 6 months after he had assumed his position, Mr. Bos-Beijer had
reduced the backlog of unresolved audits from three hundred to only twenty. Suc-
cess, however, did not come without a price. The Staff learned from a number of
sources that the reaction Mr. Bos-Beijer and some of his fellow managers received
from their staff" for holding them accountable for their work was both vehement and
hostile. Telephone and computer lines in the Institutional Review Branch were cut,
employees were harassed and intimidated, and Mr. Bos-Beijer and others received
death threats. In one instance, copies of pages from a manual detailing the use of
hand grenades were found in the work area of the Audit Resolution Branch. As
these incidents continued, employees from other divisions who shared the common
work area began to fear for their safety as well.
The problems within the office became so bad that both the Inspector General's
Office and the Federal Protective Service were called in to investigate and Marianne
Phelps, the Director of the Institutional Participation and Oversight Service, found
it necessary to send a memorandum to employees stating that, "we . . . cannot tol-
erate such behavior." According to Mr. Bos-Beijer, though, he received little, if any,
personal support from his Service Director or higher officials. He told the Staff that
senior management within the Office for Postsecondary Education seemed more con-
cerned with placating employees than they were with supporting a middle level
manager who was viewed as tough, consistent, and aggressive. As a result of his
perception that he had not been supported by senior management, Mr. Bos-Beijer
asked to be reassigned out of the Audit Resolution Branch.
A number of employees were also concerned about the role played by the Depart-
ment's Office of General Counsel. Frances Moran, the former Director of the Compli-
ance and Enforcement Division, told the Staff that during her tenure she engaged
in numerous battles with senior management and the General Counsel's office over
enforcement issues and that, while she was ultimately able to prevail in most in-
stances, she constantly had to defend, argue, and fight for the authority to exercise
enforcement decisions. She told the Staff that the General Counsel consistently in-
tervened inappropriately in enforcement matters (both for and against taking en-
forcement actions and appeals), that it viewed the program staff as incompetent and
irrelevant, that it refused to share information on matters in litigation until forced
to do so, and otherwise attempted to go beyond its role as legal advisor and control
program decisions, particularly those involving settlement matters.
Ms. Moran also expressed concern that decisions emanating from the General
Counsel's office lacked any sense of consistency, that General Counsel attorneys
often contradicted one another, and that the office resisted issuing written opinions.
Decisions appeared to be made in a vacuum, with no appreciation of the ramifica-
tions of certain decisions on overall enforcement efforts and little or no interest in
discussing case outcomes with program officials until required to do so.
Mr. Bos-Beijer was also critical of the General Counsel's office. He stated that,
from his experience, the position of the General Counsel always seemed to be to ne-
gotiate and to settle in order to make sure that the Department did not look bad,
rather than to pursue the decisions of the program offices through appropriate lines
of authority.
Jack Reynolds, former Director of the Institutional Monitoring Division, and more
recently former Director of the Institutional Participation Division, and Lynda
Folwick, who succeeded Mr. Reynolds as Director of the Institutional Monitoring Di-
vision, both told the Staff of similar problems. They stated that the General Coun-
sel's office often pursued informal settlements of appeals with institutions, many
times negotiating deals without the permission of the program office.
Mr. Reynolds and Ms. Folwick also told the Staff of what they perceived to be the
Department's failure to apply the laws and regulations governing the student aid
programs in a consistent and even-handed manner. In their opinion, senior manage-
ment was constantly looking for ways to be viewed as "good guys" in the eyes of
the entities they regulated. They were particularly concerned that senior manage-
ment constantly sought ways to help schools get off of reimbursement (especially in
the face of any overt or implied political presssure) rather than apply the law and
regulations as written. As Mr. Reynolds put it, "if they could eliminate reimburse-
ment, they would."
Mr. Reynolds told the Staff that he encountered difficulties in his efforts to apply
the Department's certification regulations in an even-handed and consistent man-
ner. As Director of the Institutional Participation Division, Mr. Reynolds oversaw
94
the Department's certification and eligibility procedures. He stated that there were
a number of times when he had to go "head to head" with senior management over
recertification decisions. Mr. Reynolds felt that schools which could somehow plead
their case directly to senior management, sometimes with political influence, were
often allowed to remain certified even when an objective approach would find that
they did not meet certification requirements.
The Department managers with whom the Staff spoke were unanimous in their
view that intense political pressure was sometimes exerted on behalf of certain
schools in other areas as well, by federal and State officials of both political parties,
and that it sometimes succeeded in obtaining preferential treatment for those
schools contrary to the career staffs decisions and contrary to their view of the ap-
propriate enforcement of the law. In particular, Ms. Folwick noted that political
pressure appeared to dictate many of the decisions made with regard to program
review, audit, and reimbursement cases.
In addition to a lack of consistency and even-handedness, Mr. Reynolds and Ms.
Folwick also felt that the Department failed to pursue an aggressive enforcement
approach. In this regard, they cited the reassignment of Lee Hardwick, the former
Director of the Institutional Participation and Oversight Service. They told the Staff
that they met with Mr. Hardwick shortly after he had been removed from his posi-
tion in the IPOS. According to Mr. Reynolds and Ms. Folwick, Mr. Hardwick in-
formed them at that meeting that he had been told by David Longanecker, the As-
sistant Secretary for Postsecondary Education, that he was being reassigned be-
cause he had been "too aggressive" and because he "took this oversight stuff too se-
riously."
Ms. Moran told the Staff that she had expressed her own concern that the Depart-
ment was "going backward" in its enforcement position to Mr. Longanecker and
Marianne Phelps, who had earlier replaced Mr. Hardwick as Director of the Institu-
tional Participation and Oversight Service. Ms. Moran said that Mr. Longanecker
and Ms. Phelps both assured her that the Department was not going backward and
that they were committed to a strong enforcement position.
Mr. Reynolds and Ms. Folwick told the Staff of other areas in which they felt the
Department was going backwards in enforcement. They were particularly concerned
about the area of program reviews. Previous Department policy had always been to
conduct program reviews with advance notice given to the institution under review.
In May 1994, however, management within the Institutional Participation and
Oversight Service, with the concurrence of the Department's regional branch man-
agement, decided to change that policy so that program reviews would be unan-
nounced. As the Staff has noted in this statement, advance notice of various reviews
allowed lADE to alter records and engage in activities designed to deceive review-
ers. In fact, the reviews which were most successful in exposing lADE's abuses were
the unannounced reviews conducted by its accrediting agency.
The decision to conduct Departmental program reviews on an unannounced basis
took effect on July 1, 1994. Apparently this decision was not welcomed by the De-
partment's senior management. Ms. Folwick stated that as soon as the new policy
began to be implemented. Assistant Secretary Longanecker began to receive pres-
sure from school associations to reverse it. In March 1995, barely 9 months into the
new policy, Ms. Folwick was told by Marianne Phelps that she would be given 1
week to justify the effectiveness of the change or it would be reversed. Given the
limited amount of time for which the policy had been effective, it was difficult ta
gauge its long-term impact. Regardless, Ms. Phelps decided that there was insuffi-
cient support for such a new policy and it was reversed. According to Ms. Folwick,
before her Division had even had a chance to notify the regional reviewers of the
reversal, Mr. Longanecker had publicly announced it.
Ms. Folwick was similarly concerned about the Department's actions with respect
to its new Program Review Guide. This guide is utilized by the Department's pro-
gram reviewers to direct them in what to look for when conducting a program re-
view. The previous guide had become a public document and it was felt by many
that institutions were able to use their knowledge of the guide to circumvent pro-
gram reviews. When the new guide was compiled, there was thus a concern that
it remain a non-public document, and that any attempts to obtain the guide under
the Freedom of Information Act be rebuffed. Ms. Folwick told the Staff that Mr.
Longanecker was concerned because the institutional community wanted the guide
released, but the General Counsel's office had opined that release should be denied
on the basis of an exemption to the Freedom of Information Act.
Mr. Reynolds and Ms. Folwick also expressed concern about the training provided
to the Department's newly hired program reviewers. In its 1991 Report on Abuses
in Federal Student Aid Programs, this Subcommittee found that "program review
staff do not generally have any criminal investigative background or training and
95
. . . often do not recognize potential fraud or other criminal misconduct. . . ." Ac-
cording to Mr. Reynolds and Ms. Folwick, new program reviewers, while receiving
better training than in the past, still do not receive any real training in detecting
fraud. They stated that their attempts to bring in fraud and abuse examiners to pro-
vide specific training in this area to program reviewers in each region were rebuffed
by senior management.
The Staff notes that both Mr. Reynolds and Ms. Folwick have also been reas-
signed in the last few months. Mr. Reynolds told the Staff that he was removed
from his position as Director of the Institutional Participation Division by Assistant
Secretary Longanecker. According to Mr. Reynolds, Mr. Longanecker told him, "you
have had over a year to become a team player and have failed to take advantage
of that opportunity." Ms. Folwick told the Staff that she was informed by Marianne
Phelps that if she was not willing to go along with her approach she would be out
as well. Ms. Folwick subsequently asked for reassignment, primarily because of sen-
ior management's failure to support her and other managers in their commitment
to hold Department staff accountable and also because of senior management's re-
sistance to a strong, consistent approach to oversight.
The information provided by these individuals is quite disturbing. While some
may attempt to portray them as disgruntled employees who are purposefully attrib-
uting the worst possible motives to legitimate actions and decisions, the Staff notes
that all of these employees appear to be dedicated individuals who were concerned
not with their own standing and reputation, but with the standing and reputation
of the Department. They are individuals who took on their positions determined to
correct longstanding Departmental problems. They were charged with developing a
plan to do this and it appeared that they were making progress in this area. Indeed,
their career records reflect a history of outstanding performance ratings. They had
turned the various divisions and branches of the IPOS into a team that was working
together to bring a consistent and even-handed approach to oversight and enforce-
ment. Whether the changes wrought by these managers will be continued under
their replacements remains to be seen. The fact that these individuals were either
relieved of their duties or felt it necessary to ask for reassignment gives the Staff
great reason for concern.
The Staff must question where the Department stands with respect to its respon-
sibilities for program accountability. Almost 2 years ago Assistant Secretary
Longanecker appeared at this table and, as had his predecessors in previous hear-
ings, assured the Subcommittee that he would strengthen the Department's mon-
itoring and oversight efforts. Unfortunately, we are back here once again, with an-
other multi-million dollar failure on the taxpayers' hands and the same old ques-
tions about the Department's capacity and commitment to hold accountable those
who would abuse these important programs.
96
97
APPENDIX 0
Gragi^jgtg/Prpqram
Edin, Computer Operations
Gabriel, Truck Driving
Jose, Computer Operations
Veronica, Computer Operations
Hector, Truck Driving
Carlos, Truck Driving
Yolando, Compirter Operations
Jesus, Computer Operations
Everardo, Computer Operations
Jot? Titie/ResponsilPilltig?
pit boss in a casino (hired before lADE training)
pipe fitter's helper
packs bags
retail clothing store
manages property
construction development
shipping and receiving
bartender
shipping clerk
100
101
c AimicAN SCHOOLS
CMPUS EL NONTE CAMPUS
ST*<T DATE FKOn 02/09/M
APPENDIX F
NO SHOV LIST
STUDENT'S NANE
•tr»A»E« PHOS. •HE^'Eim.DATE
, HARIA 6>^
(B18) laaMi D
ESL-10
AFE 02/01/9K
mmamammn
(818) t^mttr
E ESL-10
ASA 01/11/94
■B, VIRGINIA n.
(909) ^^ar
E ESL-10
AFE 02/02/94
ih SUSTAVO-^
(8i8)4mgg^
E ESL-10
AFE 01/18/94
It JOSE LUIS
(818)MMM
E ESL-10
AFE 01/27/94
a^ JUAN E.
(9091i«HHi
E ESL-10
AFE 02/02/94
MUMBERTO
(818) ■»«■
E ESL-10
RSA 01/05/94
YOLANDA D/^^
(818) laiMHH)
ESL-10
RSA 01/28/94
(8i8)«aa^pB
E ESL-10
AFE 01/05/94
«, JAVIER
(818) ifn^
E ESL-10
RSA 01/27/94
102
"ELL DATfi
SA! ETUDENT SCHEP EI"^
T tE^EWENCY
COST m?i D!!E
STATUS
0 E«6 :3W ::3co
Independent
Et fEFE'ENCE; TYPE:
SA«/ESAR RECEIVE!)
!5»:2871 AP 0! tttt'.y
ESAP. 02.'07/?4
APPENDIX G
RE" Inc. AID MHAeEWNT SYSTE" (COTE' !!'!!'« \:"i f PA5E;'
157 Ud! Ater:cit> School! 'E! Itonte)
STUDENT DASTERSHEET Ref: M 24076 A KltMi* IPC: (»/29/*4 11:13:23 Att/stjt: ir-ichool
'E'EOIIAL DATA;
HANE k S.S. Ko BORN SEI E-fHNIC HAPITAL TAf S!:E CITI.'ENEV!" A5?PiSS t "HME WWE
AKANA HARIA 6 flMMT 05/!V50 P unnirried 3 U.S. CITIZEH ISO- ^B^
Cfi ?!7i5 ?!l
EHROLLREKT DATA:
CaiRSE UKITS AC/YRHK TRAKS^ E«IROU STARTED END-DATE REV. E® STATUS WD AOSiSSlON BASIS
ENS'JSH AS A SECOND LAN6U 50 24 3! 0 50 02/09/9* 01/0t/?5 02/0!/?5 TVJ. T!!!E " " A T ! •»
ENSLISH 2ND UN6/ESL-3C 36 24 0 36 02/09/94 Ol/Ofc/95 02/01/95 'lU •^'K • COURSE CHS «/C «•!
ELISIBILITY DATA:
AHAPI BASE flSAP ■'All TAI EIPECTED ETC
YEA!; "EAR IKCOPE NON INCOKE
93-94 1992 13034 TAI 0 0
SAP RECEIVED PiCOEIE;
S* SAI EFC VAI:DAT!0K:
94 0 0 accurate
PAYIIENT DDC'»EKTS SENT Tn cj;
AY BN Paid: To Pay: Validation: Revision: Ait/Accept Date 'snt Date ?roc Date t::': Er- Valcet: Batch •
94 25 1150.00 1150.00 accurate correct.: 2300.00 02/!2'94 02/!;.'94 02/ir'9' 9404E77;
riN AID NnS: AHARSS:
.-LiDE-T 1 POP 24.00 UNITE 02/09/94 09/16/94 7.00 "lONTHS T. KECS (15.16 "lOKTH ENROLL'
Food I Housinj 429B.00 Transportation 532.00 Personal costs 1204.00 School charjes 4600.00
COST 10634.00 ETC 0.00 NEED 10634.00 UNNET NEED 6234.00
PELL 2300 6SL 0 NDSL 0 SED6 0 CHS 0 PLUS 0 SLS 0 OTXEP 0 AH »P
15T 1150 1ST 0 1ST 0 1ST 0 ' 93-94
2ND 1150 2JID 0 2ND 0 2N! 0 93-94
SUDSr 2 FOR 24.00 UNITS 09/29/94 06/05/9S 8.00 NONTHS 36 ICttS (15.16 MNTW ENROLL)
food I Housin; 4912.00 Trjnspcrtation 608.00 Persona! :ci»E :37E.00 School charje- 0.00
COST 6995.00 ETC 0.00 NEED 6B9t.00 WRET "EEI 5746.00
OELL 1150 eSL 0 fSSL 0 SE05 0 CHS 0 PIUS 0 SLS « OTKF 0 AN YR
icT !!;o icT (I !ET 0 1ST 0 94-95
PAYMENT PERIOD DATA:
Peii'jirej Start End Hours Hours Eipect Awrd Eipect Aecant Payeent
PP Hours Date: Date: PP per Hon Meets Charges Year SAI Disb Sci.eeuled Status
0! 0 02/09/94 06/09/94 12.00 3.29 15.B5 !5B:.33 9* 0 1150 1150.00 PAID
o: 12 06/10/94 09/29/94 12.00 3.2! 15.85 1508. 33 94 0 1150 1150.00 PAID
O: 2* 09/29/94 02/01/95 12.00 2.90 17.99 1506.3^ 95 0 1150 1150.00 '0 BE PAID
TUITION ACCOUNT
SCHOOL
" A» Date:
■^ayS
atu
'-? De5C':p::on
chect; «
Charjes
Cre-:t;
fi!:n:!
?: 94 02/07/94
(02/09/94) PAID
48 .»EIL SRABTS
50683 02-:
1150.00
1150.00-
02/09/9^
!? TUinON
1506.23
356.::
02/''9/94
59 ''EE!
75.00
43:.::
:: ?- 0£/c9'94
'0{-:0'94' »A!P
*8 «LL 5RANTS
55083 07c
1150.00
'16.J--
06/10/9*
59 'UITION
1502.32
791.66
09/29-94
59 'L'lVJN
1508.34
::oo.oo
!>(MM5E.'!£NT SYSTM (0076) 11/11/9* 1:4? Ml PIWS: 2
JJSO.CO
nsc.oo
Piid
Sllanct
0.00
0.00
»MA 'ARIA 6 mmmim
""> «5 "VZi'^^ *i ?EL!. 6»«MTS
TOTALS:
PfUXPS PIT SAUHICE (6L0BAL):
PP AY Pit«: Posted; Pay StJtes Description
TOTALS:
(•ONTHlv snSNOANCE:
<!10NTH,yEAR,CL»lUlBTIVE U«(ITE I 6I!AK>
0E/0?/M :2.0<l A 06/23/94 S 12.90 09,'2e/?4 2<.Mi A
ATTCifflSNcr CTj^TUE CHANSES:
?6/:2/?4 m STATUS: ruLl TIK EIPECTa HOURS PEP rOHTH: 2.90 OLD STATUS: all. TIHE
SATISFACTORY PR08RESS BEASURECENT SCHEDUiJ
2R 501 751 1001 1251 1501
EIPECTEI 05/02/94 12 07/30/94 2! 11/05/94 37 02/12/95 50 05/21/95 62 08/27/95 75
POSTED 06/09/94 12 09/2B/94 24
PERCEK'T I 4B1 541 1 1 1
rORHE TRACKIN6:
EnroH«nt Busstiofinure S»Y': 94 received: 02/01/94 status: Received and Correct
ArSA Application AwY': 94 received: 02'01/94 status: Received and Correct
Vir;*;:£tiofi Doc. done AvYr: 94 'eceiveS: 02/01/94 status: Received and Correct
•'.ect'onic App (AFSA) AwYr: ?< received: 02/02/94 status: Bitch I 0215
.Isctronic App 'AFSAl AvYr: 94 received; 02/02/94 status: Batch I 0219
♦;;'jre! fro» Incose Info:
Verif: v SA!: OOOOO FC: 90000 5e: 5A1: Sec FC: A» Yr; 94 date: 02/07/9* kind; <H Stage (•: Ori; sent
Autoeat:: postin; c( 65, 20 and 26 done to
•lardle cor.version of courses.
MM -rmi ARE NO f.A.T.'S PEffDIW
104
APPENDIX H
URGENT CONFIDENTIAL MEMORANDUM
THIS DOCUMENT IS TO SHARED WTTH NO ONE OTHER THAN THOSE TO WHOM IT IS ADDRESSED
AND Has NOT BEEN PRESERVED ON EITHER FLOPPY OR HARD DRrVE
TO:
SUBJECT: Cnrrcnt Refunds
As you >re eado tn-zn datm$ tbe penod berweeo July 1. 199^ and Itme 30. 1994. because of lADE's ux beos end oibcr
finanaal consaamu. LADE raid anty a vay unall percental uf tbc KLvais. acnolly due Ibc Pell Grant pio^u dunng tlii^
penod. Tbe actual amoom paid m rehmds dunnj flus period s-as on)>- S2M,M6 lor the canrr award year
As you are also aware, duriot this tame penod hetween 7/1/9^ and 630/94 is order to increase casta flou- we elimiiuued a
numbo' of cfaedcs and ^^t^pr** whicfa allowed dteda. vo ptioi v/ludi would not Dotmall^' Istvc printed and/or bees deposited
mto lADE's genenl lund. Dnnaf Ibu period lor acampie:
e. Hudents were nangnined to RCa»t's tyston md cl>ecta were printed bated on -icfaedulBrt" rather than "actual" tiartii.
Under itw pnor poUc)-, we waned til five days after tbc uudeni liad been ottolled to nssnui dau and pnru checks:
b. ID KBoe ■"f"T»'>i trnf**"! da& was traaszmned and '•♦"^V^ were pniued based oo uMimaiMt iT>cT>'''^ and tax data
rather than Bcoial isx leosss data. Under tbe pnor pobcy data vaf. rot wtwnitTBrt and cfaecta were not pniued until
aha tbe tax reum, if Sied. was acuaUy received: aoil
c. PeD cbedcs woe primed eves before it «-as confinned that ESAR's bad been ttfned by tbe scudeni or other required
sigaaiure were obtained. Under tbe prior poliq' wc wnfinned ibai ESAR's weir signed pnir lo tbe check bcmg
Relaxing previoasly eustisg procednres aUoived lADE to sipiificaQtly increase casta flow in ibe sbon nm Hnwever. in tbe
]oDi na. liie ctUBi;ei dramancally increase tbe asoain of refunds due. For example, many of tbe siudcm.s for whom w«.
pnnied and deposited cbecix. sbould never have received any Pell taads. at ah. ConsequcDtly. as toos as tbe drop inf ofmaiion
IS posted fa ibe«e ttudena, we will be forced to pay back AIX. a' iijc money we received for them. A.^ 1 warned when
lADE't teoicr mmagemem first desidf^i u> do tbis. tbe lonj: icrm mplicaiions for nrfmids ou-e<] bas been dramatic.
1. Ai or June 30. 1994 the total amouoi acnialh- ••■ppejrrtas:" as due in refunds is S1J)7W98.
1 Tbne arc S36O66.00 in addibooal refunds wbicb woe potted to tt>e tystem as paid oo March 8. 1994 wben Bair)-
Glassff was cotidnctint tbe most receni biennial aodil bat which in faa have nrver been deposited. RGM bas
rcpeuedly asked ns id provide the deposit slips on these refund rttrcta and reviews our banl: tuiementt or a
mootbhr bans lo detennine C the cbeckf have cleared It should be noted that tbe checks for these refund.^ were
dnwn OD banks with wfaicii we no longer do busmcas. it u currently impouihtc f or ts to deposit dtese checks mic
tbePedoal funds nccouni. Gtveo tbe tone of recent calls from RGM. I expect it will be orily a mana of i> fe*' more
days RGM. in crts- to proea its own aedibilit)- with the Depanncni of EducaiKn. «-ill delete these refunds fnam
Ibe tystem. This v-ill inoease tbe Re[und,<: Due ';9pe>tii4* on tbe sysion tc S1.44Z.664.
3. is additioo to those refunds appeariof oc tbe system, there are appronmaiely 1.607 students who are no-sbow<.
wnhdiawals, lennnuricwis, etc ^In have not been posted lo the RGM system as no longer enrolled. Approxunaie)y
7S% of LADE's tiudent's wbo drop neper refunds, bi iuiil ibe avera^ refund for due for each student for wbooi
a refund is tris^ered is appnuinaielv SS59. As such, these ttudenis vtien potted wdll ocaic approuffiiiicl}
S1.03£J10 n additional refunds, i.e.. 1.607 x .75 x 8.S9 = 1.035.310
105
4. Tbe total prqiecud imaont of reXimU^ actually dur as orjunr 30. 1994, wbiet oicludes botb posted acJ non-posiu]
rdundi. a $2^77.914
5. The msual proieaed aoioonl of refunds due ft» the mnmh of July 19W and for each montb tljcrtafier. ■ssuminr
Wf rttum to tbf pnor cheek printing Mfryunitk (a** a. h aw) f atiovf ). will be appTOXlUiaiCiv S140.000 pa
moDttt
6. These reftmd totals until peid will also create excen casti co tiand in tbe cxna same aniouni as tbe refunds due.
It should be noted tliat uapeid refunds and excess cash oo band are tae two most common reasons lor liie Depanincni
to place scbools on mmbursemeoL If tbe Departmeni were to take such acnoo on these frouiidc ^\ would he utmost
napossibli for us to jei it lilted even if we sued
Hnvmz summarized tbe problem, 1 would proposr the following potential solutioa^:
A. Only srvailable soIuuol U to pay refunds. Real issue is. ba«. Itc previously pwted S1.07M9S Is the most
imm.<<.r.i» priant>' smce tbese amount.^ are currently xhowsf as. due and will affea our exces.'^ easb oii band until
11 js fully paid and whicb would be \'er>- easy jo spr.: it a rtrnew or audiL .'osumini available funds. I woulii
suegeti tbe foUowing:
L post S900.000 m refunds paid ai tbe end of July 1994 and acmally deposit S4 50.000 ai tbai :iinnuni a', thai
ii. deposit tbe additiooal S450,000 the second «-eel: August 1994 and. daring Ibe la.r. week in Auga^u post tbe
irmBining S17S,49S in refunds as paid to tbe system and actually deposit tbe checks at tbai umc,
lii. also danB£ tbe last week in Auivs:, te-post as paid and actually deposit the S?64.166 which sbows xs
prexiousb' pud bat was tievcr deposited on 8.31AI4 so it dears m S^xember. It should be noted, howeve:.
thai should RGM as predicted delete tbe fnrr x>osdag!' wfaich sbo«' tbcw funds as puid. we would need lo
pity it sooner since tbe impbcatioiK; for excO'' cash on band would be si^ficant
iv. by September 1. 1994 approanjaiely S280.0(0 in addibonal reftmds due should have accrued. Uli.ic tbe
appearance of these reftaids can ne delayed until then, delayinp postinj much longer will leave a<^ wiih tbe
same problem we currently face. My adnce therefor i.^ thai if financially possible uiKit refund.^ al!>o be
paid by the end of September 1994.
V. dnnnf the six month period "oetween 10/1/94 and 3/31^5 we should post one-itinb (1/6) of the drops 1.607
drops which have ooi yet been posted and paying any assodaied refunds This should work oui to an
adtJiooaa! 26S drops showmg up per month and should add about S172.SS2 per momh in refunds duniig
tbe pentxl between 10/1^94 and 3/31/95. Added to pn>iectcd refunds of about S140.000 per month. loial
refund psymenis dunog this month would total about S3]ZiS2.
Acconiing to tbe proposed payment schedule the momhly icfund paymeats (not posnngs, bui ocmal deposits) would
be as follows: (The number is the month)
7 = $450,000 8 s S628.498 9 = S644.1« 10 = S312.f5J II .= S3124S1 12 = S3123S2
1 = S3Xi^S2 2 « £312452 3 = S3U,5g 4 = n40.00<l 5 = $140,00(1 6 = $140,000
Larger payment are deliberaiely scheduled earher in the award year both because of the urgenc)' of getting thi»e paid
but also because cash flow is greatest between July and September, reduces sontcwhai between OcIO^er and March,
and then dectinss significantly between .'ipril and Ime.
106
1: ibouli be notei! tit: i: may hr potuhit U' novr sfou of awjr paN'waiLi -jai posunpj naO: b\ u siua a» ivi'
IT i(nr weeu HcwTvt:. tiir psJLC lot oslsy tu: yrrMrr rul: wc mr. in ma!» o: audiu. oceu CkiL. fciuimrxemen'
aa(V(r uimi:; ou: ai£ eupbUiiy anOr: bcetu: U' (tpess isrsiuuizil Htrbups us upiiricaifj) . Kw«uw KG.M t<
aiso rrquircd to uodcr^ Ftbcral audiu, RGtti nits Ibntaicnvd Iha: li mi0>t br lorrcd 10 cliimiwit lADF't
abllttv u> pes! IK nwii retUBOL If ttau Mxrr 10 bafpcb. wt i^ould ■clu*l|v B>*r 10 pntviilc lirposiu slipi in
RGM (or «aeb refund nmit mnd wait iinti) Uier bad thr opponuiuiy to post the refund v pmd bclnrr 1: Mould
iDO* on tbt jyiteic Tnu would tnub> elmunau our abiliiy to posi rcluodt lu paid UIurT iu»> rtall> w«r».
Tb« impUcatjonj for our ablbt> u> quick): "f^" tkuttcs dunnf an audli ar» obviout.
A^ ar. IMPORT/_NT amds, ui order ui pre>«iit Hi: appesrance of ex&:s<. sasb on bsni. !i i^ a)*^ vf?^ miooTuiii uuii
LOE no: cs» (1p»-n laigt aaounis of Htl! fuDOi more nuc; aoou; five days (toe inr sno o; ticii moiiui anc ma:
wt QtboeiiusJy reoutsi ease wiuch « LESS tluji tot coects u-s Iliw fnnxei for ttit inontr. Toe anoun: wc IJNDHS
RBQ'JEST ibouid ne tot tsouni appesniif on u>t rctuuds du; refxr". ror eiaaimtz i' IDt rtiunoi Ouv icrxr-. a: inr
end o.' jut> 19'^ BidicaieC Utt: $'7}.,40^ u-av ou: ir r:tund&. we ihouli: R£DUC^ tof asiouni of our caUi icoiie^;
10: ibt nionih o: juiy K a: leasi ma asiomr. Rrroru can ht "cnersird u-iuci. "-ill jixt m s Diore auau-ax
mdicaoo: of h>' bow oiucb «t sDoulc imdsr requn: tunoi llie amouo'. o:' uie unoc iroucsi hovt-ever could be
obaaieC a: at ««n of tot loUo^-ms momii
PgiTinal Result If Not Conecied:
lADE will be reoowJ 10 underfo »'lja'. are no» amually Teauuec studsn: a:d auciu sni »ill. a; we h3\t w.':^J>
osc: adaoussed by me Nunc Coaanuuct. »ii; be icoared 10 rfoviot AUUrTiD FIN-^lNCL'tL sBL'-.r-cnuv Tnise
audits CDCBisd «iJii tiit autStsfl ^maaoa; iuements n-ill yivcn tbi aufiiur s famiimnt' »nu) Uit ROi>; jysisoi. rr^-caJ
tae unpejc rtiundi. E\'sn i: we rstamii ai au&ior ir-frniiimr wiiL RGM. me rsfunai woulc erisr oc ai.scn\-p»«j
anrasi las fiie rs>-jsw or wouW be Oixsnvziui wben thi audsio:. ai reouucd b? rt6s3l ia». me: uiUi RtJNC in -.zzi.
ali an aucSnor would tuve to 00 a: Ciis oomt id discover UK unpaid rrhmd.^ would be to look ai oc bauL- suistnen'-"
tor nit period neiweeo 7.'L'9? and 630."*; Tot staicctn: would iuw no renind dCTKuu.* excep; icr s:."i;.Sti6 for
tnc entrt awan! vta:. Tbey would sdo» only rsdsi rand! minsleri Givai toe pno: rwpon<f n' mc US
DtBsrnnen; c.' Sdusaaor. tni aCCHT 5 pnor concs-.is rtcartinj ou: past relaid probiecs Tio >• 1.': a:iTios:
csroaaiiy aiovr to rcvott aid eiipbiiir. end ascreriitaimr. jf n wert diseoveitd uuc wt tad failci 10 pa> rtiu:Ui i'lcr
eoavmcnj lata ua: wt tai solved ou: pnor probienii rraahix. ever, one; Uir rtfunaj art paid. U)r> are airsiay
laii. .'Li to:!, te: loajr wt wait to pay int rehraai uic preaier Uit nsl: to 1.ADI Otr bisps.";! dJitnmii u -.sii
uoupt »t could ooet Sfais relax cneci: pncunj proeedurt* to -entiBis uiiire msoar tn order :r pay lar ?.--Vi
refundi. tiis ^tiuld only csai: more rtncia^ nexi yer and maKf tot probiaii west assuaunj wr could luo^ 11 fa-
aoouie \xarwtaCL. iraotly. wear, l raakiy, in iifbi o.' uie Niain rixtsc^oon. u'tCty liiicmtrea anc coulo nrnvc
tna: iADZ ai d£lib:»:£iy hiddsi refunds and pnn-idtd laiw miomiaiimi 10 Conprei^ InDZ'i. «eoio: mana^cuizni
could lii£e giwnt' trosecuac;. 1 say Ihn 110; tr rsarr you. bu; 10 rooii en:: u.^ 1 oiivt beoirc tsai w: j.-i\t to fix
tbif probien nsiort 11 li disso^tiei oy tcsne ouisiot afar> .
107
APPENDIXI
Pave?
Nymbsr Of Checks
Total Paid ,
Abraham Stofenmacher
8
$ 7,097.97
Alejandro Stofenmacher
11
$ 92.951.75
Bernardo Stofenmacher
11
$ 84,591.75
Sergio Stofenmacher
35
$ 161,483.50
Alley Parking
37
$ 112,050.00
Casa Management
40
$ 181,050.00
COTC
19
$ 41,650.00
lADE American Schools
100
$1,449,829.77
KMEX7V
12
$ 266,660.00
T&P Advertising
30
$ 262,920.00
Mercedes Benz
22
$ 14,144.72
BMW Credit Corp.
11
$ 5,283.70
District Attorney Child Support
13
.$ 2,541,50
Total
$2,682,254.66
108
■ -JfWT
5E
■ ^^—^i^^
^-M^
... g»^
— [=1
—— izzse:
. i^aTte 1 *» i»iAi w»«.. iC^
^ -ssstss-cz) .=;.'ssft^ [1
16.536. BOi'
5l5.0fc
.. .. B
Wf •■'"^ '^
u
•it — :S^^^?'
r"-"
«— .—
?^ nrarais rtp
■■TiimBm. a. <k2Ki :?i^'s87-s38a
■Sijj-sr-jaoCT* s:.
5U.oi|*: "b'^^.'t: r T* T "T
c. iM .< •>« (VMH^. nm •~y' ]~ |i 2,051.31"'
^-^-■!"-r2M_.
^^rE
109
no
Ill
112
113
114
PREPARED STATEMENT OF DAVID A. LONGANECKER
I am pleased to appear before you today to share with you the substantial
progress we have made at the Department of Education to reduce fraud and abuse
in Title IV, Higher Education Act student aid programs, as we said we would do
in previous testimony before this Subcommittee. Our concern is the same as yours,
that is, to provide deserving students the chance to improve their education while
simultaneously ensuring the integrity of these programs.
We have worked hard to ensure that the institutions participating in our pro-
grams are complying with administrative and fiscal requirements as well as provid-
ing quality education and training to their students. We are doing a better job of
focusing our efforts on the "high-risk" institutions that are most likely to be operat-
ing contrary to the program's goals and objectives. In the past 2 years, the percent-
age of institutions denied initial certification in the Title IV student aid programs
has increased dramatically, as has the number of institutions removed from eligi-
bility altogether. Furthermore, fewer schools are seeking initial eligibility to partici-
pate in our programs, which indicates that our tougher standards may deter some
unqualified institutions from even applying for eligibility.
Despite the significant improvements we have made in our gatekeeping and over-
sight efforts, we believe that we can continue to improve our management of these
programs. We remain committed to enhancing the effectiveness of our oversight re-
sponsibilities and to reducing the incidence of high-risk institutions participating in
Title IV programs. In my testimony today, I will elaborate on the improvements we
have made to ensure accountability for Federal funds in the student financial aid
programs, and our continuing dedication to eliminate abuses in the future. Further-
more, I want to share with you a proposal to adopt a fundamentally different, and
we are convinced, far better approach to oversight that would build upon our accom-
plishments of the last few years.
Eligibility and Certification
In the past, too many institutions that were financially weak, had low-quality pro-
grams, or were simply unwilling or unable to administer Title IV student assistance
programs adequately were allowed to participate in these programs. To correct this
problem, the Department and Congress have been working to improve the eligibility
and certification process, and our efforts have paid off handsomely. For example, the
percentage of initial applications for certification that has been denied has increased
substantially, from 16.6 percent in 1990 to 30.5 percent in 1992 to more than 43
percent so far this year. [Charts, graphs, and a paper describing the existing
gatekeeping system are attached at the end of the testimony.]
The Department is working with accrediting agencies to strengthen their over-
sight in statutorily mandated areas, in accordance with the Higher Education
Amendments of 1992. Agencies that fail, in their accrediting of institutions, to apply
meaningful standards to assess institutional quality (with an emphasis on curricu-
lum), student outcomes, and ability to carry out institutional mission (in light of fac-
ulty, finances, facilities, and support services) will not be recognized by the Sec-
retary of Education. Institutions that change accrediting agencies or try to "shop"
for more lenient ones will not be allowed entrance into the student aid programs.
We have also appointed an outstanding group of individuals to the National Advi-
sory Committee on Institutional Quality and Improvement, which advises the Sec-
retary on the Federal recognition of accrediting agencies.
Provisional certification of institutions is another new and important tool now
being used to ensure that institutions are capable of effectively administering the
Title IV programs. Schools that are at-risk or fail other criteria are placed on provi-
sional certification and are then reviewed more carefully and frequently to ensure
that they meet the financial and administrative standards established by the De-
partment, as well as comply with all student aid rules and regulations. In addition,
all new institutions are automatically placed on provisional certification. After the
first full award year, each new institution must apply for full certification, at which
time the Department determines, based on a thorough review of the institution's
performance during its first year of participation, whether to grant full certification,
continue provisional certification, or terminate eligibility. All institutions placed on
provisional certification are subject to a system of expedited administrative review,
which enables us to remove schools from participation quickly, before problems
worsen. In all, about 600, or more than 8 percent of all institutions, are currently
on provisional certification.
The Department has also begun the recertification process, instituted by the 1992
Amendments, whereby all institutions participating in Title IV programs must
renew their certification every 4 years. This process will ensure that institutions
115
continue to meet the standards of financial responsibility and administrative capa-
bility. As I stated to this Committee 2 years ago, we are focusing our initial efforts
on the institutions that have previously posed concerns to the Department. Nearly
60 percent of the first 1,300 institutions undergoing recertification were selected be-
cause they met criteria that identify potentially at-risk institutions. Institutions
that meet these criteria include institutions that were subject to an on-site review
by either the Department or a guaranty agency in the past year; had high student
withdrawal rates; or did not meet the financial standards based upon an initial
screening of their financial statements. We realize that the recertification process
creates some burden for the institutions, and we are working on ways to reduce this
burden for high performing institutions as we continue to improve our management
of the gatekeeping system.
Monitoring Efforts
Monitoring and program reviews are other essential components of oversight that
we have improved substantially in the past few years. We spend considerable time
and effort ensuring that students and schools comply with our rules and regulations
using management controls, databases, and intensive reviews of at-risk institutions.
The Department's new Postsecondary Education Participants System (PEPS) has
recently come on-line and will be able to provide interactive access and communica-
tion among the Department, accrediting agencies. States, and guaranty agencies.
PEPS will dramatically increase the efficiency of institutional tracking and inter-
agency communication and coordination, thereby strengthening the overall
gatekeeping system.
In the last few years, the Department has also strengthened its monitoring of stu-
dent aid applications to prevent ineligible students, and students who provide false
information, from receiving Federal funds. A number of database matches are per-
formed for each student aid application. First, beginning September 1994, each ap-
plicant's name and date of birth is matched with the Social Security Administra-
tion's master file to verify the applicant's Social Security number. When we last ap-
peared before this Committee, we were checking merely to determine whether the
Social Security number the applicant reported was within the valid range of all
numbers issued by the Social Security Administration.
Second, as of January 1995, every applicant's name and Social Security number
is checked against the Department's National Student Loan Data System (NSLDS)
to determine whether the student is in default on a student loan, or has received
an overpayment on a grant and therefore owes a refund, before he or she can re-
ceive additional aid. This new data system provides more timely, accurate, and com-
prehensive loan-level information than was previously available through the
database of loans held by the Department and the default files of guaranty agencies.
Third, the Department verifies the eligibility status of applicants who claim to be
eligible non-citizens by matching their alien registration number ("A" number) with
the Immigration and Naturalization Service. Recently, the Office of the Inspector
General (OIU) recommended that we expand the Social Security number match to
include citizenship status in order to prescreen all applicants for citizenship status
rather than only those who provide an alien registration number. We have moved
forward with this recommendation and we expect to implement this match before
we begin to process applications for the 1996-97 award year. Finally, the Depart-
ment has, in the last year, begun systematically to identify students with scheduled
Pell Grants in excess of the amount allowed by law. Such excesses occur when stu-
dents transfer schools. The new check will help ensure that no such student will
receive an overpayment.
We are also building on the accomplishments of the Direct Loan Program to use
technological advances to consolidate our systems and processes. For example, we
are redesigning the Department's financial and management information systems to
ensure that data from accounting, grants, contracts, payments, and other "feeder"
systems such as student aid are integrated into one financial management system.
All of these measures will enable us to reduce our costs through the elimination of
redundant and obsolete systems, reduce fraud and system vulnerability, and facili-
tate program flexibility and change as we expand our capability to quickly utilize
new technologies.
The Department's monitoring of institutions was also assisted by the 1992
Amendments, which mandate the annual and timely submission of financial and
compliance audits by all institutions. Previously, institutions submitted financial au-
dits only after the Department detected a problem with their ability to meet the fi-
nancial requirements. Compliance audits used to be required every 2 years. Al-
though annual audits may be unnecessarily burdensome for high-performing institu-
116
tions, and we will propose ways to redress this, they are an important tool that en-
ables us to review high-risk institutions' performance before serious problems arise.
For example, findings in an institution's financial statement may lead us to conduct
a program review, in which one of the Department's 10 regional offices reviews an
institution's participation in the student financial assistance programs and initiates
corrective action to ensure that the school is using proper procedures to award, dis-
burse, and account for the use of Federal funds.
The Department performed 562 program reviews in 1994 and expects to perform
30 percent more reviews both this year and in 1996. To accomplish this goal, we
have hired nearly 100 additional program reviewers and significantly increased the
formal training we provide to them through our new Training Academy. This train-
ing encompasses a thorough understanding of student financial aid rules and regu-
lations as well as some training on how to detect criminal fraud. In just the first
7 months of this fiscal year, 48 percent more staff were trained than in all of fiscal
year 1994, and the number of hours spent in training increased 57 percent over
1994 levels.
The Department has also implemented other measures to better target high-risk
institutions for program reviews, reduce the time it takes to finalize a review, and
assess meaningful liabilities. By taking advantage of technological advancements,
we have refined automated techniques used to evaluate school status and provide
warning signals to identify high priority candidates for review; we have supplied
staff with state-of-the-art portaole computers and enabled them to access Pell Grant
payment information to support review activities; and, in just over a year, we have
made important improvements in the practice of statistical sampling so that our re-
viewers can make more sophisticated, scientifically designed assessments of the loss
caused by institutional errors or abuse.
Enforcement Actions and Default Reduction Initiatives
When audit reviews, program reviews, or other monitoring devices indicate that
an institution is failing to comply with requirements of Title IV programs, or that
a school is otherwise at-risk, the Department can limit, suspend, or terminate an
institution's participation agreement. In 1994, 191 termination actions were imposed
by the Department, and 332 institutions, the most ever for a single year, were re-
moved from participation in student financial aid programs.
The default reduction initiative has also proven to be a very effective tool in ena-
bling the Department to end an institution's eligibility from one or more of the stu-
dent aid programs when the institution's default rate exceeds certain statutory and
regulatory default rate criteria. Because the statutory threshold has dropped from
35 percent to 25 percent over a 4-year period, the number of institutions removed
from participation has increased considerably in the past few years. More than 200
schools have been made ineligible to participate in the Federal Family Education
Loan (FFEL) program based on high 1992 cohort default rates. An additional 200
institutions have appealed their default rates, and it is anticipated, based on past
experience, that many of these institutions will also lose eligibility. By comparison,
only 82 institutions lost their eligibility to participate in the FFEL program based
on high 1990 cohort default rates.
The student aid default rate declined from 22 percent in the 1990 cohort to 15
percent in the 1992 cohort. While most of the unacceptably high defaults continue
to occur in the proprietary sector, it, too, has seen a reduction in its default rate
from 41.2 percent in the 1990 cohort to 30.2 percent in the 1992 cohort. Overall de-
fault claims have declined more than 30 percent, from $3.5 billion in 1991 to $2.4
billion in 1994, despite the 33 percent increase in the volume of loans in repayment
during the same period.
Through these measures, and our overall commitment to stronger gatekeeping,
approximately 600 institutions have been removed from participation in all Title IV
programs since this Administration came into office in January, 1993. This is more
than 2V2 times the number removed from eligibility in the prior 2V'2 years.
Recent Department Improvements to Improve Communication
Mr. Chairman, as described, we have made many important improvements in the
gatekeeping system in the past few years, and we believe that the implementation
of the 1992 Amendments goes a long way toward eliminating high-risk institutions
from participating in our programs. But, as the circumstances surrounding the case
of the IADE American Schools suggest, we can do even better. An area we can im-
prove is our internal and external communications. To improve internal communica-
tion, the Office of Postsecondary Education (OPE) meets regularly with the Office
of the Inspector General (OIG) and the Office of the General Counsel (OGC) to co-
117
ordinate our oversight activities and apprise each other of significant developments.
We have numerous examples where this cooperation has helped to expeditiously de-
tect criminality and terminate illegal operations.
In August 1993, for example, the OPE conducted a program review at Clark Col-
lege in Lake Charles, Louisiana and, based on its findings, contacted the IG's office.
The ensuing collaborative effort discovered that the institution had established and
maintained false and inaccurate student records to fraudulently obtain Title IV
funds. The Department imposed an emergency action shortly after this finding and
within a month, a show-cause hearing was held, the emergency action was affirmed,
and the Department terminated the institution from further participation in all
Title IV programs. As another example of improved communication, 2 months ago,
OPE and OIG worked with the State of Maryland to close General Communications
Inc. in Rockville because of significant problems in administering their student aid
programs, and helped place students in other programs at nearby institutions.
To improve external communication among the Department, the States, and the
accrediting agencies— what we refer to as the program integrity triad — we have
begun a joint effort to share information systematically to detect mismanagement
and abuse early in the process, not later. For example, the Department sends week-
ly updates to accrediting agencies and the States when it takes action against an
institution. In turn, accrediting agencies have accepted their responsibility and have
recently reported potential problems at eight institutions. The Department has
taken the leadership role in encouraging better communication with the other mem-
bers of the triad to discuss how the triad is functioning and how it can be improved.
In May, representatives of the Department, accrediting agencies. State licensing
boards, and institutions gathered to discuss these issues. These meetings will con-
tinue in our attempt to facilitate greater communication among the triad members.
The Department's New Approach for Oversight Reform
I want to share with you today our ideas regarding a very different approach to
gatekeeping and oversight that will build upon our efforts during the past several
years. Our decision to propose a fundamentally new approach to our oversight func-
tion is. in part, a response to the continuing abuses of the student aid programs,
of which the lADE situation is an example. As you know, the 1992 Amendments
enhanced the gatekeeping system by providing additional authorities to the States
through State Postsecondary Review Entities (SPREs). Initial efforts to implement
these statutory provisions suggested that the SPRE program was developing as an-
ticipated, and would appropriately focus review only on those institutions that de-
served greater oversight.
Creating the SPREs, however, changed the relationship between institutions and
their State and Federal Governments so substantially that the overwhelmingly neg-
ative response from the postsecondary community created an environment that sim-
ply made it impossible to sustain the partnership we need to serve students well.
In most respects, the Department's relationship to schools in the student aid pro-
grams is a healthy and productive partnership. In others, however, the relationship
requires us to be strong enforcers of the law and protective of students and the tax-
payers. Our new approach will continue a balanced partnership between the Depart-
ment, the States, and accrediting agencies, with the Department having a stronger
role in managing the relationship among the three partners. This new approach will
be based on three major tenets: (1) it will differentiate between for-profit and non-
profit institutions and between degree-granting and non-degree granting programs;
(2) it will differentiate among institutions by their performance in Title IV programs
to create a fairer system, improve the effectiveness and efficiency of our gatekeeping
operations, and provide regulatory relief; and (3) it will ensure that prospective stu-
dents are provided adequate information about institutions to make informed
choices about which institutions and programs to attend.
In an effort to ensure fairness, current law and, more importantly, long standing
departmental practice and Congressional intent, often require that all institutions
be treated exactly the same. But, we have learned that this policy has been mis-
guided. Institutions do differ, and they do so intentionally. Indeed, we believe that
these differences are part of what makes our system of higher education so strong.
We have also come to believe that treating different institutions differently respects
the wide variety of types of institutions that are part of the educational system, and
is actually a more appropriate approach to ensure fairness and to protect students
and taxpayers than trying to treat different institutions exactly the same.
And from a practical perspective, we know that a disproportionate share of the
problems we face with fraud, abuse, and mismanagement occur at the for-profit in-
stitutions providing short-term training. Thus, it simply makes sense to treat these
118
institutions differently, and our proposal does just that by distinguishing between
profit and non-profit institutions, and, as importantly, between degree and non-de-
gree programs.
Our new approach will recognize high performance in all sectors, and reward it
with reduced regulation, oversight, and administrative burden, so that we can spend
our valuable and limited resources more closely scrutinizing the institutions that
pose the greatest risk.
The last aspect of our new approach requires institutions to provide information
about educational programs and student outcomes to prospective students in order
to help them make more informed decisions about where to enroll. This will help
to ensure that market forces work better to eliminate inadequate institutions and
programs. The information provided by institutions will vary between degree and
non-degree programs. For example, institutions that offer non-degree programs will
be required to provide information on graduation and job-placement rates. Institu-
tions will be required to report this information to State-run One-Stop Career Cen-
ters that will act as honest brokers of information and will be required to make this
information available to prospective students.
We will implement as much of this proposal as we can through changes in regula-
tion and by simply changing the way we do business. We will, however, need your
support. There will be pressures from many quarters to soften the approach and
limit our efforts to protect students and the taxpayers. Attacks on the so-called "85-
15 rule" make that clear. We hope this Committee will be a valuable ally as we con-
tinue to focus our efforts more efficiently and to better target those institutions that
deserve more oversight.
Other Statutory Changes Needed to Help Ensure Program Integrity
At the same time, we are identifying other, more modest, statutory changes that
we believe would enhance the overall integrity of institutions participating in Title
IV programs. First, the Department recommends broadening the scope of Section
498 of the Higher Education Act to require a personal financial guarantee against
liabilities from the owner of any proprietary institution that is placed on provisional
certification. The statute currently allows the Department to require personal guar-
antees from an institution's owners only after a currently-participating Institution
has demonstrated problems. This proposed change would protect the financial inter-
est of the public by requiring financial guarantees from owners of institutions that
have been specifically identified, through provisional certification, as being high-
risk. This type of personal commitment is the same commitment a responsible bank
official would demand in making a loan to these schools, and it would motivate the
owners to exercise greater care and supervision of their managers and employees,
and to provide students with higher quality services.
Second, we recommend that the individuals with financial authority and respon-
sibility at institutions be held personally liable for an institution's unpaid refunds.
In this respect, we would treat the institution's financial officers the same way the
Internal Revenue Code treats a corporation's financial officers who fail to pay with-
holding taxes.
Third, the Department strongly recommends against delaying again the require-
ment that for-profit institutions generate at least 15 percent of their revenue from
non-Title IV sources. The Department believes that the implementation of the "85-
15 rule," which arose out of the 1992 Amendments, will have a significant positive
effect on the quality of trade school training. Congress deferred the requirement last
year and we are aware of various efforts to delay implementation again, or to dimin-
ish the law and accompanying regulations in other ways. While we fully support the
85-15 law, we would propose that high graduation and placement rates be used as
mitigating circumstances so that high-performing institutions that are unable to
meet the requirements of the 85-15 authority will not automatically be declared in-
eligible. Similarly, we intend to ensure that proprietary institutions do not cir-
cumvent the intent of the legislation simply by switching to non-profit status.
Finally, we want to hold institutions that unsuccessfully appeal high cohort de-
fault rates liable for the default costs and subsidies that are paid by the Department
on loans made to that school during the appeal process. Currently, institutions may,
with impunity, continue to receive loans during the appeal period. Our proposal
would also require a school that chooses to receive loans during the appeal process
to post surety in an amount sufficient to cover these costs.
Conclusion
Mr. Chairman, we recognize and take seriously our responsibility to maintain the
integrity of the student financial aid programs, and believe we have made signifi-
119
cant improvements in the existing gatekeeping system. Our hard work in imple-
menting the regulations arising from the 1992 Amendments and in improving the
management of these programs has helped to significantly reduce the number of
high-risk institutions that are participating in the Title IV programs, while continu-
ing to provide access to postsecondary education for students who would not other-
wise continue their education after high school. Indeed, $30 billion will be provided
to students enrolled at 7,200 different institutions this year. While the amount of
aid is more than ever before, the number of participating institutions represents a
15-year low. Simply put, more and more unqualified schools are being denied en-
trance into Title IV programs, and those that are accepted are being monitored more
closely to ensure that they operate within the boundaries of financial and adminis-
trative responsibility.
Mr. Chairman, we will continue to do everything we can to reduce Title IV pro-
gram abuse even further, and we appreciate your efforts to do the same. Whenever
our investigations establish criminality, the Department will use all avenues avail-
able in order to seek prosecution of those involved. We look forward to continue
working with you to ensure that the Federal funds appropriated to student financial
aid programs are properly disbursed to the eligible students and institutions.
I would be happy to answer your questions at this time.
120
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126
Statement of
John P. Higgins, Jr.
Acting Inspector General
U.S. Department of Educati<ni
Before the
Permanent Subcommittee on Investigations
Committee on Govemmoital Affairs
United States Senate
Regarding
Fraud and Abuse
in the
Federal Pell Grant Program
July 12, 1995
127
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me to share with you the perspectives of the Office of Inspector General
on fraud and abuse in the Federal Pell Grant program, m^^^^^mmmmmmi^^ii^m^^
I have been encouraged by the active role taken by this The chiOlmges facing aU of us can
subcommittee in overseeing the Department's activities bt wtet mUy wiA OufiOl, active,
in general and this $6 billion student aid program in par- and cet^endve participatian cfaO
ticular. I believe that the challenges facing all of us in
providing quality education through this program can be
met only with the fiill, active, and cooperative participation of all concerned parties.
We testified before this subcommittee in 1993 about several problems in the Pell program. In
summary, our earlier testimony explained that, by virtue of the program's design, the Depart-
ment relies on the integrity of participant organizations and agencies to assure that grant awards
are only made to eligible students. Federal funds are a^^^^mmt^mmmmmmi^^i^^^m
administered properly, required refunds are made, and ne Department relies heavily on
expenditures are accurately reported to the Department. the integrity ofpmiicipant organi-
In our 1993 testimony, as well as our testimony before xatimu and (^^des.
this subcommittee in 1990 on what are now called the ■■■^■^i^iwiMi"*"^^^^™"^"
Federal Family Education Loan programs, we also identified several problems in the
"gatekeeping" process— the means by which postsecondary institutions are permitted to
participate in the Pell Grant program and other Federal student aid programs, authorized under
Title IV of the Higher Education Act (HEA).
Much has been done to resolve the administrative problems we discussed regarding the gatekeep-
ing process, and we want to credit the Department for its ^^^^^i^H^iMHHiaMHMHHiiM
responsiveness in this area. However, more remains to Much has been done to resolve
be done to address the systemic problems we identified ffUekeqm^ problems; however,
in the Title IV gatekeeping process and in the Pell Grant more ranains to be done.
program itself. In addition to the unresolved problems ^^^^^^^^^^^^^^^^^"
identified in the two prior hearings, other problems have surfaced since 1993. In some cases.
Congress will have to make legislative reforms to address these systemic problems.
Today I wish to focus on these systemic problems. In doing so, I will provide an update on the
issues covered in our testimony in 1993, discuss additional concerns that have been raised in our
recent audit and investigative work, and discuss a q}ecific case that illustrates many of these
problems— lADE American Schools.
The following were major topics covered in our 1993 testimony that I will update for you today:
► The Title IV gatekeeping process;
► Oversight of the postsecondary instimtions responsible for the day-to-day administra-
tion of the Pell Grant program; and
► Internal departmental controls over grant authorizations and payments to schools.
In 1993 we also discussed opportunities for improvement in the oversight of the Department's
contracts for administering various components of the Pell Grant delivery system. Because of
other priorities, such as the development of the new Direct Lx>an program, we have just begun
128
to review the current status of this component of the Pell program, and are not yet able to report
our findings.
Update on Issues Discussed
IN THE 1993 Testimony
Gatekeeping
The suitability of approximately 7,000 public, private non-profit, and for-profit institutions par-
ticipating or seeking to participate in the student financial ^hhm^^h^^^h^^^^h^m
aid (SFA) programs, including the Pell Grant program,
is determined by the State licensure, accreditation, eligi-
bility, and certification procedures commonly referred to
as the "gatekeeping" process. As we have reported and
testified to on many previous occasions, this gatekeeping
process has proven insufficient in keeping fmancially
and/or educationally weak and unscrupulous schools out of the SFA programs.
The gaukeqiiag procets has
proven insujjident in keeping
finandaUy and/or educationally
weak and unscrupulous schools out
of the SFA programs.
Accreditation
In our testimony before this Subcommittee in 1993, we stated our belief that the then recently
reauthorized Higher Education Act would provide the legislative framework needed for the De-
partment to hold accrediting agencies more accountable for ensuring the quality of education
provided by schools they accredit. We noted further, however, that because membership ap-
pointments had not been fuialized to the National Advisory Committee on Institutional Quality
and Integrity (NAC), the body responsible for advising the Secretary regarding accrediting agen-
cy recognition, it was not possible to evaluate application of the new tougher standards provided
by the 1992 HEA reauthorization.
While we are encouraged to report now that the Depart-
ment moved expeditiously to promulgate regulations nec-
essary to implement the new statutory standards and the
NAC is currently operational, our recent review of ac-
crediting agency plans for implementing the new stan-
dards suggests delays in utilizing the tougher accrediting
standards. Details of this review are provided later in
my statement.
Our recent review of accrediting
agency ^ans for implementing the
new, tougher accrediting standards
tuggests ddays in utilizing the
iNsnTunoNAL Eligibility and Departniental Certification Processes
In our 1993 statement, we discussed three audit reports issued between 1989 and 1991 that fo-
cused on the institutional eligibility process, the administrative certification process, and the fi-
nancial certification process. Numerous recommendations from these three audit reports were
addressed in the 1992 amendments to the Higher Education Act, thus providing the Department
► 3
The DepartmaU has taken action
presented in our three audU
reports.
129
with greater ability to screen out institutions that abuse the Title IV programs. Implementation
of the new law became effective with the issuance of the final regulations in 1994.
Each year since 1989, the Department has recognized that the gatekeeping process was a high-
risk area and reported it as such in their annual Federal
Managers' Financial Integrity Act self-evaluation report
to the President and Congress. Because of the Depart-
ment's reported corrective actions and the expanded au-
thority under the HEA of 1992, we conducted follow-up
work to assess the effectiveness of the improvements to
the gatekeeping process. We concluded that the Department had taken action to correct many
of the problems we had presented in our three audit reports. For example, the Department has:
► Implemented several key regulatory changes to prevent high-risk institutions from en-
tering the student aid programs.
* Started the conversion of their old institutional data base system to a more effective
and efficient data base management system.
► Implemented a more rigorous review and analysis process of institutions' financial
statements during the certification and recertification process.
While the Department has made numerous improvements in the gatekeeping processes, there are
still certain key areas where corrective action is in process but not yet completed. Some of the
operational weaknesses that need to be addressed are as follows:
*■ Implementation of the plan to recertify all in- h^^^hm^h^h^h^h^^^^
stitutions by 1997 did not begin until 1995, DOays in in^lenunting recer^fica-
which will make it difficult for the Department tion piaas wOl make it difficult for
to meet this statotorily required deadline. We tiu Department to meet its statu-
recommended that the Department focus its tory deadline.
staff resources on recertifying the high-risk in- ^^^^^^^^^^^^■^^^^™*
stitutions and devise a streamlined approach to recertifying the low-risk institutions.
^^ There still remains a problem keeping track of the institutional files. As in previous
reviews, the Department could not locate all the files we requested. In our most re-
cent review, they were unable to locate approximately 14 percent of the files we re-
quested. While the Department had upgraded their file maintenance, they still need
to implement tighter controls over file circulation.
Oversight of Title IV Institutioiis
We reported to this subconmiittee in 1993 that we had in-process a performance audit to evaltiate
the Department's institutional review process. We had initiated this audit because of the signi-
ficant role that participating schools play in ensuring effective day-to-day administration of the
Pell and other programs on campuses.
In December 1993, we issued our audit report entitled, "Report on the Effectiveness of the Re-
gional Institutional Review Branches' Monitoring of Institutions Participating in the Student Fi-
nancial AssisUnce Programs. " This performance audit evaluated the efficiency and effectiveness
of the operations of the Department's regional oversight of participants in the SFA programs.
We recommended changes to the mission, structure, hiring, and training practices of institutional
review offices; better targeting of institutional reviews; establishment of performance standards
for reviews; enhanced computer utilization; and establishment of reporting standards, which to-
gether will increase the return on limited Departmental resources.
The Department's Office of Student Financial Assistance (OSFA) agreed with our recommen-
dations, provided us a corrective action plan, and has initiated implementation of many of the
improvements we recommended regarding their oversight of schools.
ED Grant Authorization and Payment Systems
As we testified during the October 1993 hearings before this Subcommittee, we had begun a
survey of the Pell Grant system and identified audit areas with potentially serious control weak-
nesses. These audit areas included: student application errors, the initial authorization piocess.
Pell Grant refunds and repayments, close-out and reconciliation of institutional Pell Grant ac-
counts, and the performance of Pell system contractors. At this time, we have completed a re-
view of selected student application edits and a review of the Pell Grant close-out and reconcili-
ation process. Additional audit efforts in the other areas are planned, or have begun.
In September 1994, we issued an audit report that ad- "^^"^^"^^^^^^^^^^^^
dressed the control strucmre over the citizen verification ^Hkese ineligible recipients were
process that would prevent ineligible, non-U. S. citizens awarded $70 miUion in PeU Grants
from participating in the Pell Grant program. For award "^'"uther $45 million in Staf-
year 1992-93, we compared the citizenship stams of all /o^'^^wk.
Pell Grant recipients who had claimed U.S. citizenship
with the Social Security Administration's (SSA) computer daubase and found that, based on SSA
data, over 45,000 were not U.S. citizens. These ineligible recipients were awarded $70 million
in Pell Grants and another $45 million in Stafford Loans.
We recommended that OSFA strengthen its existing citizenship verification process by confirm-
ing the citizenship stams of all student aid applicants with the Social Security Administration.
We are now working with the Department and SSA to effect this improvement prior to the 1996
Pell award cycle.
Also in September 1994 we issued a report on our ""^^^^^^^^^^^^^^"^
review of Pell Grant close-out practices and procedures Onr half Ou approxiinately 6,700
administered by the Office of Studem Financial parHeipating institutions uUmitted
Assistance. Our review noted that, for award year 1991- ocpf'^i^f reports that contained
92, over half the approximately 6,700 participating ^^^^on<^ totaling over $356
instimtions submitted expendimre reports that contained
discrepancies totaling over $356 million. We made
specific reconunendations which, if implemented, should strengthen OSFA's closeout policies
and procedures and safeguard millions of dollars from possible misuse.
131
Additional Concerns
Since the Subcommittee's bearing in 1993, we have completed much additional woiic concerning
the Pell program. While this woric has revealed many inq>rovements in the Department's man-
agement of this program, it has also given rise to additional concerns. For discussion purposes
I have grouped these concerns into those related to performance measures and standards, pro-
gram changes needed to prevent abuse by trade schools, and fiscal changes needed to prevent
abuse by trade schools.
Performance Measures & Standards
ttudau aid programs.
The lack of measurable, outcome-oriented program goals ^^^^^^■■■■^^^^^^^^
and the resulting lack of adequate program performance *** *■«* ofmeasiinM*, mteome-
information are fundamental problems of the Pell Grant orunted program goals u a fimda-
Program and the other Title IV student aid programs. '^!^/^!^!iZ!i^' Title IV
The following examples, which are based on work we * "
have done since 1993. illustrate the nature of these
deficiencies.
ACCREDITING AGENCY STANDARDS
Through the Higher Education Amendments of 1992, Congress established several provisions
to correct gatekeeping deficieiKies. One of the most important of these provides for perform-
aiKe standards that would, for the first time in the history of the Title IV student aid programs,
defuie measurable objectives and thereby establish much needed clarification of the purpose of
the programs. Under the new stottitory provisions, accrediting agencies that want to be recog-
nized by the Secreury of Education as reliable authorities regarding the quality of education
offered by the schools they accredit— and thereby participate in the Title IV gatekeeping process
—must develop instimtional quality standards in such areas as student course completion, State
licensing examination pass rates, and job placement rates.
In order to assess progress in the development of these perfomumce standards for smdent ach-
ievement, we recently conducted on-site reviews of five agencies that accredit institutions pro-
viding vocational training programs under Title IV. These agencies were selected for review
because the institutions and programs they accredit are, by statute, eligible for student aid for
the purpose of providing students the skills necessary to obtain gainful en:q)loyment.
riamalbf mandated performance
Overall , our reviews concluded that the accrediting agen- ■^^^^^■■^■■■■■^^
cies had made little progress in developing aiK) imple- AeeredWi^ agencies have m
menting the new, congressionally mandated performance y^/*"^^ ^ ^'^'^^"'^
standards. One of the five agencies had established a
quantitative job placement standard. However, since it
did not have an adequate system for verifying the self-
reported data submitted by its member schools, the
standard was of limited usefulness.
•> 6
132
One reason for the slow progress accrediting agencies are making in this area is the fact that the
final regulations for the new gatekeeping provisions were not published until April 1994. How-
ever, we determined that the most compelling barrier to progress is that agencies are reluctant
to use performance data to assess the effectiveness of the job training programs they accredit.
To do so would, in their view, put them in the position of being "government regulators."
Considering the findings of our review, we are doubtful there will be any meaningful reform in
the accreditation process despite the statutory mandate for accrediting agency standards. We
believe the Congress should consider legislating appropriate performance standards for schools
participating in the Pell Grant and other Title IV programs.
State Postsecondary Review Entities
The Higher Education Amendments of 1992 also provided for new Stote Postsecondary Review
Entities. In addition to being responsible for monitoring Title IV activities of postsecondary
schools in their States, these entities would also be responsible for establishing acceptable mea-
sures for student achievement for participating Title IV schools. Although the Department
worked deliberately to implement the SPRE program, absence of funding has prevented full
program implemenution. Without State Postsecondary Review Entities, this is no adequate
mechanism for meaningful State oversight of the Title IV programs.
Usefulness of Title IV Vocational Trad^ing
As currently designed, the system of Title IV funding for vocational training affords little as-
surance that the training provided to students is helping them obtain gainful employment. Our
reports issued in 1987 and 1993 noted that individuals ^t^^mm^Bm^mmi^^^^^mamm
were being trained, with a heavy investment of Federal Our rtporu issued in 1987 and
funding, for nonexistent jobs. Our 1993 report pointed J993 noted that individuals were
out that student aid programs are structured to make being trained, with a heavy invest-
funds available to students without regard to labor mar- ment of Federal fiauUng, fornon-
ket needs or to the performance records of schools. We exigent jobs.
believe that the statutory purpose of preparing students
for gainful employment in a recognized occupation could be better accomplished and limited
Federal vocational training funds more effectively used if the current funding system were fun-
damentally changed.
Under the current method of funding vocational training, ^^^^^^^■^■■■■^^'^■^^
a participating school can enroll as many students as Only 14 percent of the studaits en-
possible and disburse as much suident financial aid as is '^"^ '^ the five schools we re-
available. However, because there are no performance ''*^'«' *^ completed the training
standards for smdent achievement, there is litUe incentive "^ '^"!^!'" "^^ ^**'^' *"
for a school to be overly concerned about how many of ^"""^ "^
its students graduate and find jobs. School recruiters can
promise glamorous, high-paying careers to prospective students, but graduates often receive
much less than was promised. As we have previously noted in congressional testimony, our
1993 report found that of the 3,055 students who had been enrolled at the five schools we
133
reviewed, only 432 (14 percent) completed the training and received the required license to prac-
tice their new trade.
Further, many students enroll in vocational training programs, incur significant debts, and then
are unable to find work because they have been trained in fields where jobs are unavailable.
These students often feel victimized and default on their student loans. They are ineligible for
additional aid by virtue of their defaults and are thereby hindered in their pursuit of other edu-
cation and career options. Students and taxpayers lose under this system.
Our 1993 report pointed out that it is time for funding ■■■^^^^^■^^^^^^^■^^
approaches that would maximize the remm on the SFA It is timt for fiutding approaches
funds invested and provide incentives for schools to do ^^ ^""^ maximize the return on
better. It is not unreasonable to expect an adequate re- *« SFA funds invested and provide
turn on the billions of dollars in SFA funds invested in *««»^»/»'' »«*«* ^ *> *««"••
vocational training. Specifically, our 1993 report recom- ^^^^^^^^^^^^— ^^^hi^^
mended that labor market needs and the performance of
schools in graduating and placing their students be considered in SFA funding for vocational
training. We also recommended that the Department take the lead in convening an interagency
task force to study different funding approaches for vocational training.
While the Department agreed initially with our recommendations, and we believe some action
was taken in response to our report, it is unclear at this time what further action the Department
plans to address problems identified in the report.
Programmatic Changes to Prevent Abuse by Trade Schools
Departmental efforts to prevent fraud and abuse in the Pell Grant program continue to be pla-
gued by several programmatic deficiencies that allow trade schools to abuse the program. I have
previously addressed them in earlier testimony before immammmmmmmm^mi^i^^^^mm^
this subcommittee. I will address several that surfaced ^orts to prevent fraud and abuse
in cormection with the lADE case on which this subcom- in the Pell Gnmt program continue
mittee is focusing in these hearings. Specifically, these to be pU^ued by programmatic
program deficiencies relate to ability-to-benefit require- deficiencies.
ments, clock-to-credit-hour conversion, and English as ^^^^mmmmm^^^^^mmmmi^mm
a second language. Another issue 1 will address is Pell Grants for prisoners because a loophole
in the law has recently become evident. For some of these issues, which are described below,
the Department will need the help of Congress to develop effective solutions.
Ability to Benefit
To be eligible for Title IV assistance, students without ^"^^^^"i^^^^^^ii^"^^"
high school credentials must pass an approved test. The ^* have found a great deal of
manner in which such a test must be administered and by obuse in the area of 'ability to
whom has been a matter of some controversy over the ^""fif testing.
years, leading to many statutory and regulatory changes. ■^■^^■^^■■■■■■■■^^■^^^
We have also found a great deal of abuse in the area of testing of students admitted on the basis
134
of their supposed ability to benefit from the training program, particularly by proprietary trade
schools.
For example, some schools set a score below that recommended by the test publisher, which in
our experience defeats the purpose of the test and allows students who caimot benefit from the
training offered to be admitted. We have found tliis situation in several audits, including that
in lADE. Recognizing the conflict inherent in letting schools themselves administer the test and
set the score, since they have an interest in admitting the maximum number of students to£ollect
the maximum amount of Federal aid, in the 1992 HEA Amendments Congress authorized the
Secretary to specify the passing score on independently administered tests approved by the Sec-
retary (section 484(d)(1)). However, the Department has not yet lo publish fmal regulations
implementing the provision. Therefore, the issue remains unresolved and the potential for abuse
continues to exist.
Because the whole issue of admitting non-high-school graduates to Title rV-fiinded institutions
has proved so problematic, particularly in the trade school area, we have started an audit to eval-
uate the success of such students in graduating from Title FV-fiinded training programs and be-
coming employed in the area for which they were trained. We hope to be able to provide the
data to policy-makers for purposes of determining whether this provision of the Higher Educa-
tion Act needs to be changed.
Credit-Hour Defimtion of Clock-Hour Training Programs
Clock-to-credit-hour conversion is the practice among ^^^^^"^^^■■■■■■^■^^^
trade schools of changing the way they identify the Trade schooU an aNe to increase
length of their programs in order to establish eligibility '*^ Federal student aid receipts
for participating in the Pell Grant program and other ^inthout adding signifiauuiy-if at
Federal smdent aid programs, or in order to increase the '^^^^^"'^''^ ""^"^ "^
amounts they receive through these programs. By using
credit hours instead of clock hours for measuring their ^^^^""""'''"'^^^^^^"^^^"
programs, trade schools are able to increase their Federal student aid receipts without adding
significantly— if at all— to the instructional content of their courses.
The notion of credit hours, borrowed from the traditional academic world, is based on the as-
sumption that students are performing substantial assigned work outside of the classroom. Ac-
crediting agencies routinely approve clock-hour to credit-hour conversions without verifying that
any significant outside course work is done and without requiring additional instructional mate-
rial.
We have identified this issue in several audit reports and highlighted our findings in a summary
report issued in 1990. However, our audit positions on this matter have not been upheld by
administrative law judges because of a lack of explicit regulations on the defmition of a credit
hour. Eventually the Department published the needed regulations; however, in June 1994,
before the regulations took effect, a Federal district court judge preliminarily enjoined their en-
forcement. The judge recently rendered his decision on June 16, 1995, concluding that, "Having
determined that new regulations were neither arbitrary nor capricious, nor otherwise contrary
to law, the court is bound to uphold them. " It will now be iiKumbent upon the Department to
•> 9
135
implement the new regulations. At the same time, the abuse has and will continue, to some
extent, during implemenution.
The Department asked Congress to resolve this matter through its reauthorization of the Higher
Education Act in 1992. Subsequently, failing a statutory solution, the Department pursued the
regulatory solution I have just discussed. During our testimony before this Subcommittee in
1993, we referred to this problem and the millions of dollars that had been wasted because of
it. The following quotation from that testimony is as applicable today as it was in 1993, and
tmderscores the intractability of the Pell Grant program's problems:
... it may be inviting to think that, in the context of reinventing government or
otherwise, we can do away with prescriptive regulations. However, we must be
cautious when applying this approach in an area or to an industry where there
is an identified pattern of abuse. While addressing the very real need to reinvent
the way we arc doing business, it is critical to focus on the safeguards needed
to prevent abuse of taxpayer funds and students. The clock-credit hour conver-
sion issue demonstrates that the easy availability of huge sums of Federal SFA
funds provides motivation for some unscrupulous program participants to look for
gaps in the existing laws and regulations in order to enhance their own financial
interest rather than that of the students or the public. In rendering their de-
cisions, courts will require that regulatory or legislative requirements are clear,
and we must ensure that such requirements exist to protect taxpayers and the
intended beneficiaries of the SFA programs.
English as a Second Language
In August 1994, we issued a report that asked the question, "Why Use Pell Grants For Instruc-
tion In English As A Second Language? Taxpayers Pay
More and Students Get Less." Since the Department "... uapayerspay more and
provides Federal funds for instruction in English as a students get less."
Second Language (ESL) to adults under the Pell Grant
program as well as under various federally funded Adult Education programs, questions are
raised as to the comparative cost and quality of the instruction provided under each program.
When Pell Grants are used for ESL, the education is provided by proprietary schools that charge
between $4.77 and $10.00 per hour of instruction for a course of study lasting between 240 and
600 hours. ESL instruction funded by Adult Education programs is typically provided by local
educational agencies and non-profit organizations. The costs per hour of instruction in those
programs are significantly lower and the hours of instruction significantly higher than in those
programs provided by proprietary schools with Pell Grant funding.
In addition to lower costs and more instructional hours. Adult Education programs expect stu-
dents to achieve higher levels of English proficiency and have higher standards for instructor
qualifications. We recommended that the Department ask Congress to eliminate ESL courses
from eligibility under the Pell Grant program and, if needed, request additional ESL funding
under the Adult Education programs.
► 10 «
136
Pell Grants for Prisoners
The Higher Education Amendments of 1992 stipulated ^^^'■■■'■■■■■^^^"^^^^^^
that schools whose enrollment of incarcerated students is Loopholes have permitted prisoners
at or greater than 25 percent are not eligible to partici- «> eontinue to receive PeU funds.
pate in Title IV student aid programs. Subsequently, the ^^^"^""'^'^^^•^^^^^'^^
Crime Bill of 1994 contained a general prohibition against the awarding of Pell Grants to pris-
oners. However, there are loopholes in these provisions that have permitted prisoners to con-
tinue to receive Pell funds.
The Higher Education Amendments authorize the Department to grant waivers to non-profit
schools to permit them to continue to enroll large numbers of prisoners, and the Crime Bill has
been interpreted as applying only to Federal and State prisons. Thus, as we have found in recent
audit work, a school that enrolls prisoners from a county jail and obuins a waiver of the "25
percent rule" may continue to participate in the Pell Grant program. Unless the Department can
address this long-standing problem administratively, additional legislative action will be needed.
Fiscal Changes to Prevent Program Abuse by Trade Schools
In addition to: 1) the need for measurable program goals and clearly defined performance mea-
sures, and 2) the need for congressional help in closing programmatic loopholes that allow trade
schools to abuse the Pell Grant and other SFA programs, we believe that clear and enforceable
program eligibility regulations are critical for maintaining program integrity and accountability.
One key examples of this is the so called "85-15" rule and personal liability for school owners.
THE "85-15 Rule"
This provision, which was passed by Congress in the 1992 reauthorization of the Higher Educa-
tion Act, required that proprietary schools be able to attract at least 15 percent of their revenue
from non-Title IV sources. This mechanism uses the market place rather than prescriptive Fed-
eral regulations as a means to ensure, to some degree at least, that the training offered is valu-
able and that the price charged Federal taxpayers is reasonable.
Before this provision could be implemented. Congress ^^^^^^^^^^^^■'^^^™
postponed its effective date to July 1 995 . We feel strong- ^*« provision would eliminate
ly that the provision would eliminate many trade schools **"••>' *"^ schools that were ere-
that were created simply to take advantage of Federal j^ "^.y ^ '^' advantage of
largess rather than to provide quality vocational training, rederal largess.
and would also serve as an incentive for reforming abus-
ive practices in trade schools. We therefore hope that the effective date of this important provi-
sion will not, again, be postponed.
School Owner LiABmrrY
It has proved very difficult, if not impossible, to collect program liabilities— particularly refunds
—from corporate institutions that participate in Title IV programs. Owners of defunct or bank-
rupt schools typically walk away with tremendous financial gains while taxpayers and students
are left with large debts. While Congress enacted a provision in 1992 to allow the Department
137
to require personal financial guarantees from owners and
controlling individuals of schools participating or seeking
to participate in the Title IV programs (section
498(e)(1)(A)), another provision added during conference
has created confusion about the congressional intent, and
the Department has failed to utilize the provision.
Owners of defunct or bankrupt
schools typically walk away with
tremendous financial gains while
taxpayers and students are left with
large debts.
At a minimum. Congress should clarify what we believe
is a reasonable interpretation of Section 498. That is,
that section 498(e)(1)(A) authorizes the Department to
obtain personal financial guarantees from owners or con-
trolling individuals of institutions that have participated
in the Title IV program for less than 5 years, without re-
gard to the factors listed in subparagraph (e)(4). This ^^^^^^■^^^^■^^^^^^■~
would protect the Federal financial interest for students that do not have a track record of re-
sponsible stewardship of Federal funds.
Clarification by Congress would
protect the Federal financial inter-
terestfor students that do not have
a track record of responsible stew-
ardship of Federal funds.
A Recent Case of Program Abuse:
lADE American Schools
We performed audit and investigative work at LADE American Schools (LADE) during 1 992 and
early 1993 and are currently conducting additional investigative work at lADE. Had the
problems I have just discussed been resolved prior to our reviews of lADE Americans Schools,
issues surfaced in those reviews would have been minimized. For example, LADE's improper
administration of ability-to-benefit provisions cost the American taxpayer at least $1.3 million
in just two years and abuse of clock-to-credit hour conversions cost the taxpayer $2.8 million
in the same time period. Further, absence of owner liability provisions allowed lADE officials
to retain ill-gotten financial gains.
LADE was a proprietary trade school operating in California and Florida. We initiated an audit
of LADE due to the rapid increase in Pell Grants. Several allegations of fraud were received in
the course of the audit. At the time of our lADE reviews, there was a very large caseload of
investigations, including many cases similar to this one, and other high-priority cases were then
being investigated that ultimately resulted in a significant number of indictments and convictions
and the seizure of valuable assets. For example, during the lADE investigation our Lx)s Angeles
office issued five Federal seizure warrants to seize three commercial properties and two personal
residences of the owner of a Long Beach, California, trade school.
As a result, although a criminal case was opened, it was not worked sufficiently. Instead, the
audit continued and a large sample of smdent files was reviewed and several other tests were
conducted to follow up on several of the allegations. The auditors kept the investigators advised
of their results. The audit identified significant deficiencies in the school's administration of
Pell, and recommended large dollar recoveries. It also provided the basis for a report to the
Department, mentioned earlier, recommending that Pell funds not be used to fund ESL training.
However, it did not identify material evidence to indicate records falsification and found that
refunds were being paid, but late. Given the nature of the audit conclusions, the decision was
made to close the criminal case.
Protecting this program from those
that would intentionally abuse it
for illegal monetary gain remains
problematic.
Since conducting these activities at lADE, we have made
management and procedural changes to address the diffi-
culties discussed above. I have made available to the
Subcommittee specifics regarding these changes as well
as descriptions of significant investigative cases we have
worked since the lADE case. We are convinced, however, that protecting this program from
those that would intentionally abuse it for illegal monetary gain remains problematic unless
fundamental changes such as I have discussed here are implemented.
Conclusion
Resolving these weaknesses will
require Congressional action as
well as continued attention by the
Department.
Mr. Chairman, this morning I have attempted to provide
for the Subcommittee an overview of what are, in our
view, the more significant issues regarding prevention of
abuse in the Pell Grant program. Clearly, the Depart-
ment has made strides to improve its management of this
program, but critical systemic program weaknesses re- ^"^^"^"""^^^^^^^^^^^^
main. Resolving these weaknesses will require Congressional action as well as continued atten-
tion by the Department. The Pell Grant program will continue to be a primary target for the
work of my office, and we stand ready to assist you and the Department in any appropriate way
to achieve needed improvements in this program.
Thank you. I will be happy to answer any questions you or other members have at this time.
139
PREPARED STATEMENT OF CORNELIA BLANCHETTE
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to present information on the U.S. Department
of Education's Federal Family Education Loan Program (FFELP) and Federal Pell
Grant Program. As you are aware, these are the largest federal programs providing
financial aid to postsecondary students. In academic year 1994, they provided over
$26 billion in loans and grants to over 10 million students.
During your Subcommittee's hearings in 1993, we testified on abuses in the Pell
Grant Program, i Because of your continuing concerns, you subsequently asked us
to review (1) the extent to which the Department's student aid data are effectively
used to help ensure compliance with federal requirements and prevent any abuses
from reoccurring, and (2) the improvements that the Department has planned or
made to its student aid systems. Today you are releasing our report on the results
of this study. My statement, which is based on the report, highlights the results of
our work. 2
Data used in our analyses were maintained in the Department's student loan and
grant systems. Recognizing that the Department has had long-standing problems
with how timely and accurate its student loan data are, we eliminated potentially
erroneous data from our analysis. For example, we identified over 6,400 loan records
that had date fields that were in error because (1) they contained zeros or (2) they
contained dates that were before the time that FFELP started.
Results in Brief
In general, the Department has done a good job of providing grants and loans to
eligible students, but it has been less effective in using available data to enforce
compliance with federal requirements. For example. Department data indicate that
43,519 ineligible students may have received 58,105 loans, totaling over $138 mil-
lion, for fiscal years 1982 through 1992, and that more than 48,000 students may
have received overpayments of their Pell grants during the 5-year period ending in
award year 1993. While our findings concern a small percentage of the total number
of loans and grants in the Department's data systems, they indicate that the Fed-
eral Government can loose large sums of money through erroneous payments to stu-
dents, some of whom are ineligible for any federal student aid.
The Department has initiated a series of improvements to its student loan and
grant systems and programs. These include developing new systems, implementing
data controls in existing systems, and strengthening program reviews at schools.
These improvements are steps in the right direction, but some, corresponding with
our review, have just recently been put in place and it is too early to determine
their effectiveness. For example, new systems such as the National Student Loan
Data System (NSLDS) — a national database on student loans and Pell grants — are
just becoming fully operational. We also believe that some of the system controls
in place, such as those to prevent students who had previously defaulted on loans
from obtaining additional aid, are not sufficiently aimed at prevention.
In our report, we made recommendations to the Department to analyze student
aid data more closely to identify patterns of noncompliance with federal require-
ments.
BACKGROUND
The Department of Education administers student financial aid programs under
title IV of the Higher Education Act of 1965, as amended (HEA). During academic
year 1993-94, student financial aid totaled $29 billion. The largest single source of
this aid (72 percent) was FFELP,^ which provided over $21 billion to 6.5 million bor-
rowers. The second largest source of aid was the Pell Grant Program, which pro-
vided $5.6 billion in grants to 3.7 million students. During fiscal years 1983 to 1991,
annual federal payments for FFELP loan defaults increased over 700 percent, from
$445 million to $3.6 billion. Although FFELP loan defaults have decreased in the
past 2 years, the Federal Government paid out over $2.4 billion in fiscal year 1994
to make good its guarantee on defaulted student loans.
^Student Financial Aid Programs: Pell Grant Program Abuse (GAO/T-OSI-94-8, Oct. 27,
1993).
^Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately Awarded Loans
and Grants (GAO/HEHS-95-89, July 11, 1995).
3 FFELP was formerly called the Guaranteed and Stafford Student Loan Programs.
140
Federal Family Education Loan Program
Most FFELP loans are based on financial need. A student typically applies for a
loan, and the school verifies the student's eligibility. The school determines, based
on family income and the estimated cost of attendance (COA), the amount of aid
the student is eligible to receive. The student receives the loan from a participating
lender. One of the state-designated guaranty agencies guarantees the loan against
default. The agency is the intermediary between the Department and the lender, in-
suring the loan made by the lender to the student. The guaranty agency also en-
sures that the lenders and schools meet program requirements. The Department
pays the interest due while the student is in school. The student begins repaying
the loan, including interest and principal within 6 months after leaving -school. The
Department also reimburses guaranty agencies for most of the defaulted loans they
paid to lenders and for some of their administrative costs.
Federal Pell Grant Program
Pell grants are distinguished from other financial aid in that students meeting
federal ehgibility criteria are given, not loaned, money. The Pell grant amount is
also based on the student's COA and financial need. Schools, which make the grants
on behalf of the Department, are to ensure that (1) each student meets federal eligi-
bility requirements for the grant and (2) each eligible student is paid the full Pell
grant that he or she is eligiole to receive. During award years 1984 through 1994,
Pell grants were awarded to over 32 million students, totaling over $50 billion.
Systems Used to Monitor FFELP and the Pell Grant Program
The Department annually collected loan data from guaranty agencies and consoli-
dated them in the FFELP database.'* These data, the principal data available for
the Department to use in monitoring FFELP, were used to (1) calculate annual stu-
dent loan default rates for schools participating in FFELP; (2) target program re-
views of schools, lenders, and guaranty agencies; and (3) identify possible ineligible
borrowers and loans exceeding statutory limits. But the usefulness of these data
was limited because the data were not provided to the Department until after loans
were awarded, sometimes as long as a year afterwards. The timeliness problem,
however, is expected to be alleviated to a great extent when NSLDS is fully oper-
ational, if it is implemented properly. NSLDS is designed to provide on-line access
to student loan data, which are to be updated monthly, not annually like the FFELP
database.
As part of its monitoring of the Pell Grant Program, the Department collects stu-
dent information from schools and consolidates it through the Pell Grant Recipient
and Financial Management System (PGRFMS). This system is used to track schools'
request for funds and provide schools documentation to use in reconciling their total
disbursements to students under the Pell Grant Program during an award year,
with the records of the individual students participating in the program at the
school. Starting in the fall of 1995, NSLDS will also contain Pell grant data, which
will be updated weekly.
DEPARTMENT DATA INDICATE STUDENT FINANCIAL AID INAPPROPRIATELY AWARDED
The Department's data show that ineligible students have received millions of dol-
lars in student financial aid, and some eligible students have received more aid than
permitted under the law. Students are generally ineligible for additional aid after
defaulting on earlier loans and are prohibited from receiving funds in excess of stat-
utory limits or their COA. Further, students are prohibited from concurrently re-
ceiving Pell grants from two or more schools.
Ineligible Students May Have Obtained Aid and Defaulted on Subsequent Loans
We identified 43,519 students that the Department's data showed may have been
ineligible for 58,105 loans. The loans totaled over $138 million. To identify these
students, we used student loan data in the Department's FFELP database for fiscal
years 1982 through 1993. As an example of what we found, one student defaulted
on a loan in May 1992, making the student ineligible for subsequent loans. Accord-
ing to Department data, however, this student received five additional loans: one
in February 1993, two in July 1993, and two in September 1993. In another exam-
ple, a student defaulted on a loan in September 1986, thus making the student in-
eligible for subsequent loans. According to Department data, however, this student
also received five additional loans: one in 1988, three in 1989, and one in 1990—
4 years after defaulting on the first loan. Further, according to the data, as of Sep-
"As of November 1994, NSLDS replaced the FFELP database and the data in the FFELP
database were used to populate NSLDS.
141
tember 30, 1992, of the 43,519 students who were ineUgible for additional loans,
20,210 defaulted on 23,298 loans subsequently made to them. The amount outstand-
ing on the subsequent defaulted loans, including interest and principal, was over
$56 million.
Through our analyses of both FFELP and PGRFMS data, we identified 101,327
students who previously defaulted on a student loan and were, therefore, ineligible
for further federal student aid. Nevertheless, the data showed that they may have
received 139,123 Pell grants totaling approximately $200 million. Of these ineligible
students, 73,934 may have received one grant, 19,838 two grants, and over 7,555
three or more grants.
Students May Have Received Loans Greater Than Their Cost of Attendance
The Department's FFELP database showed that, since 1982, students have re-
ceived loans that exceeded their COA. The average amount of the overpayment was
about $1,200 and ranged from less than $100 to over $13,000; the overpayments to-
taled $2.4 million.
Information available to the Department for tracking student loans — the FFELP
database — was not used to verify that students received financial aid equal to or
less than their COA, even though a COA data field is available for use. A Depart-
ment official said that schools determine students' COA and financial need at the
beginning of the student aid application process and that the Department relies on
schools to ensure compliance with federal requirements.
To identify cases in which aid awarded exceeded COA, the Department could col-
lect and use COA data to stop these practices and collect funds that were inappro-
priately awarded. COA data are currently used by schools to determine the amount
of aid a student is eligible for, and we found that some schools are reporting these
data. Therefore, collecting and reporting these data to the Department should not
be a major burden for schools.
Students May Have Concurrently Received Pell Grants From Two or More Schools
According to the Department's records, during award years 1989 and 1993, over
35,000 students may have received Pell grants while attending two or more schools
for the same enrollment period. The Department's data showed that these students
attended two or more schools and received grants during the same month and year.
Since the inception of the program in 1973, students have been limited to receiving
Pell grants from one school at a time, even if they concurrently attended multiple
schools. Schools are responsible for ensuring that students do not concurrently re-
ceive Pell grants from more than one school.
Although the Department has data to identify students who may have received
grants while concurrently attending two or more schools, it does not use them for
this purpose. Department officials said the data may be misleading. For example,
they said the Department does not know how many of the students we identified
or in PGRFMS actually received Pell grants concurrently from two or more schools
because PGRFMS only records a student's enrollment date, not the date the school
disbursed the grant. However, we believe that the information available to the De-
partment indicates that numerous instances of noncompliance may have occurred
and that, therefore, the Department should investigate further.
Students May Have Received Pell Grants in Excess of Statutory Limits
The Department has a control in place to prevent Pell grant payments from ex-
ceeding the maximum statutory limit for students attending a single school. ^ Using
Pell grant data for award years 1989 through 1993, we found no instance of a stu-
dent receiving a Pell grant greater than the statutory limit. However, the data
showed that 48,010 students attending two or more schools may have received mul-
tiple Pell grants that in total exceeded the statutory limits. For example, in award
year 1993, one student received grant funds totaling $5,640. The statutory limit in
1993 was $2,400; therefore, the student received $3,240 over the limit.
For award years 1994 and 1995, the Department implemented a system check in
PGRFMS designed to block any Pell grant awards that would result in an overpay-
ment and, as a result, the second school should not receive funds for that student
unless the first school reports a downward adjustment. Because this system check
was recently developed, it was too soon for us to determine what effects it will have
on preventing Pell grant overpayments.
^The maximum statutory limit is set by the program's authorizing legislation. The appropria-
tion legislation, however, often lowers the maximum statutory limit to meet the government's
overall goals for domestic discretionary spending. We used the maximum appropriated statutory
limits to determine whether students received overpayments.
142
OVERSIGHT AND ACCOUNTABILITY IMPROVEMENTS MADE, BUT MORE NEEDS TO BE DONE
We found instances in which compHance responsibihties were divided and data
were ineffectively shared between Office of Postsecondary Education (OPE) units in
the Department. In April 1991, the Department and Office of Management and
Budget (OMB) jointly reported on the results of their review of how the Department
administers student financial aid programs and made a series of recommendations.^
The Department subsequently reorganized OPE in 1992 and developed a series of
initiatives designed to better oversee FFELP.
Although the Department has completed initiatives and has others underway, we
continued to find instances of lapses in accountability in which compliarice respon-
sibilities were divided among OPE units. For example, at the time of our review
there was no unit responsible for overseeing all aspects of the Pell Grant Program.
Responsibilities for policy, accounting and financial management, as well as for pro-
gram systems were divided among three OPE units that did not routinely share in-
formation with each other. According to a Department official, the office for Pell
grant systems had difficulty obtaining information from the office responsible for the
financial functions of the Pell Grant Program.
During our review, OPE reassigned personnel and began making other organiza-
tional improvements that address our concerns about the dispersion of responsibil-
ities among units. For example, in January 1995, it consolidated the Pell Grant and
Applicants Systems Divisions into the Application and Pell Processing Systems Divi-
sion; in April 1995, it consolidated the Pell Grant and Campus-based Financial
Management Divisions into the Institutional Financial Management Division. Al-
though we have not thoroughly evaluated these recent changes, they appear to pro-
vide a better organizational framework for program oversight and accountability.
OTHER IMPROVEMENTS UNDER WAY
During the past 2 years, the Department began implementing a number of other
initiatives to address problems in operating and overseeing of its student financial
aid systems. We found, for example, that the Department has improved its (1) stu-
dent aid systems, including developing new systems, such as NSLDS, and imple-
menting changes to existing systems, and (2) gatekeeping efforts by expanding the
criteria for scheduling institutional program reviews.
These improvements have addressed many problems in Department systems and
controls. But as discussed in more detail in our report, the Department must con-
tinue to make enhancements to help ensure compliance with federal requirements
and to eliminate situations such as these that we found.
Developing NSLDS
The Department is developing NSLDS to be the first national source of current
loan and grant data on student financial aid participants. NSLDS, for example, is
to provide the Department (1) on-line access to loan data on a loan-by-loan basis
and (2) more detailed current information on each student with a FFELP loan.
When fully implemented, NSLDS is expected to provide an integrated view of HEA
programs and should help ensure that improved and more accurate information is
available on student loans.
NSLDS is planned to be implemented in three phases. Phase I began in 1993 and
included populating NSLDS with data submitted by guaranty agencies. It became
operational in November 1994. As a result, annual guaranty agency submissions of
FFELP data tapes to the FFELP database ceased, although NSLDS will be updated
with monthly data submitted by guaranty agencies.
Phases II and III, which include providing a central source of financial aid infor-
mation, are expected to begin by the summer of 1995. The system, for example, is
expected to provide financial aid transcripts, which will include information such as
whether a student is in default on a loan or owes a repayment on a grant because
of a previous overpayment. According to a Department official, selected Pell grant
data from PGRFMS will be entered into NSLDS during Phase II.
Department Efforts to Strengthen Existing Systems May Not Go Far Enough
To reduce the likelihood that loans will be made to students who are ineligible
because they had previously defaulted on their student loans, the Department has
strengthened controls in its student financial aid systems. These changes include
computer matches to identify students who defaulted and edits to identify Pell grant
overpayments.
'^Administration Adopts Plan to Reorganize Student Financial Assistance Programs, U.S. De-
partment of Education and the Office of Management and Budget (Washington, D.C.: 1991).
143
In July 1992, in response to an Office of Inspector General (OIG) recommendation,
the Department expanded its computer matching. Through the Guaranty Agency
Default Match, student aid applicant records are matched with guaranty agency
files containing the names of students who defaulted on student loans held by guar-
anty agencies. OIG concluded that preventing ineligible students from receiving
FFELP loans or Pell grants — abuses that the two computer matches were designed
to prevent — should reduce program costs $300 million annually.
The computer matches have not been fully effective. From our analyses of data
in the FFELP database, ineligible students appeared to continue to receive loans
after the data matches were implemented. Specifically, the number of loans made
to ineligible students increased from 10,450 in fiscal year 1990 (which was before
the computer matches began) to 12,134 in fiscal year 1993 (after both matches were
implemented). The amount guaranteed on these loans also increased, from about
$24 million in fiscal year 1990 to over $33 million in fiscal year 1993. For fiscal
years 1989 through 1993, the number and amount of loans made to ineligible stu-
dents increased each year, despite the implementation of the data matches.
We discussed these findings with OIG officials. They were concerned that the
matches were not preventing subsequent loans from being made to ineligible stu-
dents. They have agreed to determine whether (1) the data matches were failing to
identify subsequent loans to ineligible students and (2) ineligible students actually
received the monies.
Expanded Program Review Efforts
The Institutional Participation and Oversight Service (IPOS), the OPE unit re-
sponsible for monitoring schools and ensuring their eligibility to participate in HEA
programs, conducts on-site reviews at schools to determine if they are meeting pro-
gram requirements. These program reviews are principally used to (1) identify viola-
tions and abuse after they occur and (2) target and conduct subsequent reviews.
OPE has revised its strategy for targeting IPOS program reviews by focusing on
schools that had (1) significant increases in loan and grant volume and (2) high de-
fault rates for student loans. In part as a result of the Permanent Subcommittee
on Investigations' October 1993 hearing and recommendations in a 1993 OIG audit
report,'' IPOS revised and expanded its criteria for selecting schools for program re-
views. For fiscal year 1993 program reviews, the Department had 8 criteria for iden-
tifying schools for review. The number of criteria increased to 25 beginning in fiscal
year 1994.
In addition, IPOS and OIG have begun to coordinate their review efforts to work
better together and to help prevent simultaneous, uncoordinated, and multiple visits
to schoois. For example, beginning in the spring of 1995, IPOS and OIG began meet-
ing monthly to discuss on-going OIG work and what effect it may have on IPOS re-
views
Because most of these initiatives were recently implemented, it was too soon for
us to determine what effect they may have on improving compliance with federal
requirements for the Department's student financial aid programs.
CONCLUSIONS
According to data in the Department's FFELP and the Pell Grant Program data
systems, the vast majority of student financial aid was awarded in accordance with
federal requirements. But in some instances these systems failed to ensure compli-
ance with federal requirements in awarding student loans or Pell grants — conditions
that have been long standing and that are likely to continue unless changes are
made and effectively implemented.
We recognize that the Department relies extensively on schools to provide aid to
eligible students in accordance with federal requirements. But the Department must
improve its use of its data to support schools in their compliance assurance role and
to evaluate schools' effectiveness.
Over the past several years, the Department has strengthened program controls,
interoffice communications, oversight, and the systems used in administering its
student financial aid programs. We commend these efforts and believe that they
show a clear commitment by the Department to improve its management of the pro-
grams. But weak areas still exist. For example, data matches have not been fully
effective in preventing ineligible students from getting additional aid and some De-
partment systems, such as NSLDS, as currently being implemented will only iden-
tify ineligible students and will not be used to prevent them from receiving aid.
''Report on the Effectiveness of the Regional Institutional Review Branches' Monitoring of Insti-
tutions Participating in the Student Financial Assistance Programs, Audit Control Number 05-
20075, U.S. Department of Education (Washington, D.C.: 1993).
144
Many of the problems that we identified have been long-standing and are likely
to continue unless the Department takes further action. In our report, we made rec-
ommendations to the Secretary to take actions to improve the accuracy and com-
pleteness of student aid data, such as continuing to screen data entered into NSLDS
to ensure that they are in a consistent format, and testing the accuracy and validity
of data in NSLDS.
Mr. Chairman, this concludes my testimony. 1 will be happy to answer any ques-
tions that you or members of the Subcommittee may have.
appendix i
Related GAO Products
Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately Award
ed Loans and Grants (GAO/HEHS-95-89, July 11, 1995).
High Risk Series: Student Financial Aid Programs (GAO/HR-95-10, Feb. 95).
Financial Audit: Federal Family Education Loan Program's Financial Statements
for Fiscal Years 1993 and 1992 {GAO/AIMD-94-131, June 30, 1994).
Student Loans: Millions Loaned Inappropriately to U.S. Nationals at Foreign Med-
ical Schools (GAO/HEHS-94-28, Jan. 21, 1994).
Student Financial Aid Programs: Pell Grant Program Abuse (GAO/T-OSI-94-8,
Oct. 27, 1993).
Financial Management: Education's Student Loan Program Controls Over Lenders
Need Improvement (GAO/AIMD-93-33, Sept. 9, 1993).
Direct Student Loans: The Department of Education's Implementation of Direct
Lending (GAO/HRD-93-26, June 10, 1993).
Financial Audit: Guaranteed Student Loan Program's Internal Controls and
Structure Need Improvement (GAO/AFMD-93-20, Mar. 16, 1993).
Department of Education: Long-Standing Management Problems Hamper Reforms
(GAO/HRD-93-47, May 28, 1993).
Department of Education: Management Commitment Needed to Improve Informa-
tion Resources Management (GAO/IMTEC-92-17, Apr. 20, 1992).
Student Loans: Direct Loans Could Save Billions in First 5 Years With Proper Im-
plementation (GAO/HRD-93-27, Nov. 25, 1992).
Stafford Student Loans: Millions of Dollars Awarded to Ineligible Borrowers
(GAO/IMTEC-91-7, Dec. 12, 1990.)
145
BART GORDON
Congref(si of tfie ^ttiteb States;
J^oxat of i£eprn(entatibeK
statement of Congressman Bart Gordon
submitted to the Permanent Subcommittee on Investigations
Committee on Governmental Affairs
July 11, 1995
Mr. Chairman, I want to thank you and the committee for
allowing me to submit a statement to what I consider a very
important hearing of the Permanent Subcommittee on Investigations.
As you may know, for several years reform of federal student
loan and grant programs has been one of the top priorities of my
service in Congress.
My strong interest in this issue began when I was approached
by parents in my district who complained that the cost of college
combined with the difficulty in receiving financial assistance
meant that their children were putting off college for a year or
two — or sometimes forever.
I decided to take a hard look at exactly where the billions of
tax dollars for federal student grants and loans were going.
I found two serious problems, fraud and abuse in loan and
grant programs as well as an explosion of defaults in taxpayer
backed loans. As members of this committee know, in 1980, aibout
ten percent of the new funds appropriated for loan programs went to
pay-off bad or defaulted loans, but by 1990 fifty-four percent of
those funds were going to cover defaulted student loans -- and not
available to other worthy students.
My investigation of Pell grant abuse and outrageous default
rates led me to the source of much of the problem, unscrupulous
proprietary schools which were not in business to educate students
but instead to use students to get access to federal dollars.
The bad apples have been very bad for federal student
financial assistance programs, and for that reason I committed to
those parents in my district to do all I could to address these
issues.
For the record, I will also submit to the committee a
videotape of the NBC news program. Expose which includes my own
undercover visit to one Tennessee proprietary school and gives an
accurate overview of how problem schools have wasted precious funds
in both the Pell grant and student loan programs.
After two years of a very hard fight, we enacted real reform
and this committee under the exceptionally strong leadership of
Sen. ^funn was key to that success. The very good news is that
146
default rate* are decreasing. Onforcunacely, the fact that today'*
hearing Is necessary indicates that we have a long way to go before
we can honestly say we have done enough to protect students and
taxpayers.
I am sorry to report that today's hearing is more about what
we failed to do a few years ago when we passed a series of hard-
hitting reforms aimed at cleaning up federal higher education
financial aid programs.
One important amendment was removed from the final conference
report during the higher education reauthorization process .
The loan cutoff for high default schools survived the
conference and became the law of the land. Schools with 50 or even
60 percent default rates are no longer sucking up taxpayer backed
loan dollars and leaving students high and dry with nothing but
debts they can't pay.
But because an important provision was removed in conference
many of these same schools have continued to receive Pell grants.
Think about what that means: if v(e don't trust these school*
to handle loan dollars responsibly, does it make sense to allow
them to receive millions of dollars in grants, for which there is
even less accountability than in the loan program. In fact, most
schools in the Pell grant program are allowed to draw down federal
tax dollars directly, opening the door for the kind of abuse that
will be discussed here today.
In the last Congress, I sponsored legislation to remove
schools that could not be trusted to handle taxpayer backed loans
from the Pell grant program as well.
Some argued that my amendment would keep poor students from
receiving an education. That is not the case. Onder this type of
reform, students who are eligible for Pell grant* will go to
schools where counseling, course completion and job placement are
priorities, not afterthoughts.
Some community collages amd public vocational schools that
charge low tuitions will have only a tiny percentage of their
students receiving student loams. In such cases, a few defaulting
students could cause the entire school to lose its student aid
funding. But the Secretary of Education now can and should exempt
schools from the default rate cutoff when a cutoff would be
inequitable.
Pell grants should help students get an education, graduate
and find jobs. There are an ample number of good schools, public,
private, non-profit and for-profit proprietary that focus on doing
just that, and tougher guidelines will only bring more students
into their classrooms.
147
Mr. Chairman, my amendment would have saved $40 million in
budget authority for fiscal year 1995, but just as importantly it
would have saved thousands of students from being sucked into
worthless programs. The story of one school which you will hear
today should only serve to underscore this point amd the importance
of continuing reform.
Finally, I would like to address a broader issue closely
related to the policy implications of today's hearing.
The Federal Direct Loan Program, currently in its first year,
has been described by one Department of Education official as "a
Pell grant with a promissory note." In many ways I believe that is
an accurate description and is an in^xsrtant reason why I have
opposed the proposal to fully implement direct lending without a
careful test.
The model for the direct draw down of federal dollars in
direct lending is very similar to the same system which has led to
repeated cases of fraud and abuse in the Pell grant program. As
many as 45 schools that have probleaus with their Pell grant
operation now have been allowed to sign up for the direct
government loan program. Also, FDLP cxirrently has no means of
measuring default rates for schools in the program, and
understandably high default school are moving into direct lending
as quickly as possible.
Direct lending has the potential to become a safe haven for
the kind of operations you are investigating today, and I believe
that issue is worthy of review by this capable and proven
committee.
148
/foa(gpnieiy Gcwnty Gowsrnmeat
July 28,1995
Senator William V. Roth
Chairman
Permanent Subcommittee on Investigations
Russell Senate Office Building
Room 193
Washington, DC 20510
RE: Hearing On Federal Student Grant Program Abuses
Dear Senator Roth:
Over the last two years, the Montgomery County Office of Consumer
Affairs has investigated several vocational sch<X)ls. These
investigations uncovered a wide range of deceptive trade practices
being used by these schools in their ef forts to attract students
and the government money that comes along with them. The bait tnat
is often used to attract students is the relatively "no strings
attached" Pell Grant. Vocational school scams have historically
been a problem. However, attempted reforms have been piecemeal at
best I am urging the Subcommittee to use these Hearings as «n
opportunity to fully examine the factors that create an environment
!n which fraudulent schools and well -meaning but ineffective
schools, thrive at the expense of the taxpayer and to the detriment
of those individuals who are attempting to improve their lives
through vocational training.
Based on our investigation, it appears that the leading factor in
this environment is the disconnect between the school's training
activities and the verifiable placement °f . ^^ude^ts /n jobs
requiring the skills that are ostensibly being taught by the
school. Eligibility of schools to receive Pell Grant monies and
federally guaranteed student loans must be controlled by the
product (jobs) it produces, not by a review of a school's training
program or process of teaching. If the school is not producing :ob
placements, it does not deserve to be receiving federal monies^
Such performance reviews should be quite stringent and should occur
quite often.
Offia of Consumer AK»in
I Maryland A.enut. RockvMlc. M.ryUnd 20850. JOl/217.757}, TDD » 301/217-2999. FAX » 301/217-7J67
149
Senator William V. Roth
Permanent Subcommittee on Investigations
July 28, 1995
Page Two
Our investigation revealed that once students have been attracted
by promises of "free" money, they are further duped by false
promises of quality vocational training and job placement. They
then, with the very best of intentions to improve their lives,
apply for and receive student loans. The harm that is caused by an
inadequately monitored Pell Grant program is not limited to the
dollar amount of the grant. Rather it must also be measured by the
financial obligations that are imposed upon deceived students as a
result of their legal responsibility to repay loams, as well as the
detrimental effect these financial obligations have on any future
opportunities to access the job market.
Ironically, the promises of training and employment are not only
unfulfilled promises but result in cui experience that severely
limits the potential of many student to succeed in their chosen job
path. Several of the vocational schools we investigated have closed
abruptly, leaving students without recourse against the school and
saddling the students with large loans. The majority of complaints
involve students claiming that the school made promises of high
tech education, guaranteed employment, and high salaries.
In the case of one such school, we have received complaints not
only from the students who were in attendance at the time the
school closed, and who may be helped by the new federal regulations
covering closed schools, but also from students who attended
several years ago. The allegations from both groups were the same,
making it clear that the school was deceiving students for years.
The students who attended in the past auid feel they received
nothing from their time at the school are now being faced with the
federal government collecting their tauc refunds and placing a
negative report on their credit rating. They are having difficulty
renting apartments or getting credit for car loans; bare
necessitates for staying in the work force auid maintaining their
independence . The school that received the money from the federal
grant and loan programs is the only party benefitting from the
student's attendance. The losing parties are the taxpayers and the
students.
In another case, a vocational school received large amounts of
federal money by systematically soliciting students who were very
low- income and oftentimes unemployed. This school was almost
exclusively funded by Pell Grants and federally guaremteed student
loans. The deception visited upon these individuals started with
the very first solicitation they received from the school. The
marketing pitch was such that they did not know it was a vocational
school. They were told it was a job training program and that they
would "earn while [they] learned" .
150
Senator William V. Roth
Permanent Subcommittee on Investigations
July 28, 1995
Page Three
In addition, they received promises of "free money", and promises
of employment, via the school's "96V Placement Rate". However, it
was found that only 6* of the students graduated and of these
graduates those with jobs had either obtained the job on their own
or the skills needed for the job had no relation to the computer
skills allegedly taught by the school. Once again, the students who
attended this school are faced with large student loans . Because
of their unemployment smd lack of skills these loans will probably
remain unpaid, leaving the student with marred credit and no chance
of attending a legitimate school.
These are just two examples of schools that abused the Pell Grant
and federally guaranteed student loan programs. The primary goal of
these schools was to access federal money, not to provide
meaningful vocational training and job placement. In light of the
current workforce's need for skilled workers and the desire of
individuals to obtain training and a decent job, this is completely_
unaccepteible and a blatant miscarriage of the public purpose upon
which the Pell Grant and federally guarouiteed student loain programs
are premised.
By creating and enforcing a link between continued receipt of such
monies and job placements, this Subcommittee will have gone a very
long way toward alleviating the practices being discussed during
this Hearing and uncovered in our investigation of a selected
number of vocational schools. Anything short of mandating such a
definite and measurable link would seem to be a continuation of the
piecemeal reform efforts that have been attempted so many times
before.
I appreciate the opportunity to provide you with the insight our
Office has obtained and would also appreciate your including this
testimony in the permanent record for the Hearing into the abuses
in federal student grant programs. Part II. If you have any
questions, or if we may be of euiy assistance to you and your staff,
please feel free to contact either Mr. Joe Giloley, Administrator
at 301/217-7394 or Ms. Sue Rogom, Investigator, at 301/217-7391.
Sincerely,
Barbara B. Gregg J—
Director
h : \general\roth . j tg
151
EXHISIT #
nStTXTZOPLBAItNINO
THE STATE EDUCATION DEPARTMENT / THE UNIVEi^SITY Of Th£ STA'.- OF NEW YORK/ ALBANY 'M Y 12250
DEPUTV COMMlSSONEf! fOP HIGHiR tOUCAIlON A^JO TrU PPOf ESSCKB
July 18, 1995
The Honorable Sam Nunn
U.S. Senate
303 Senator Dirksen Office Building
Washington, D.C. 20510
Dear Senator Nunn:
On behalf of the New York State Education Departnnent, I thank you and your
staff for your efforts to combat fraud and abuse in Federal student financial aid
programs. We have followed over the years the hearings on waste, fraud and abuse
of student financial aid by the Senate Permanent Subcommittee on Investigations and
are aware of the commitment of time and energy which has been made.
As New York's State Postsecondary Review Entity (SPRE), we are acutely
aware of the need to maintain a strong Federal/State partnership to thwart those
postsecondary institutions that would abuse Federal student aid programs which
represents 75 percent of all student aid in the nation. We believe that the
postsecondary community efforts to eliminate SPRE if successful at this time would
send the wrong message, lead to a loss of accountability and would be especially
unfortunate in its timing -- discontinuing a well-conceived process which is on the
verge of showing results. (Please see the attached rationale for preserving the SPRE
program.)
As a significant component of the oversight of student financial aid, the SPRE
program is a critical element in the triad defined in Title IV Part H of the
1992 Amendments to the Higher Education Act, which was designed to assure
appropriate use of the nation's huge investment in higher education. We urge that
you use your leadership and long hearing record to assure accountability through the
SPRE program.
Sincerely,
Donald .^Nolan
Attachment
152
SPRE
(State Postsecondary Review Entities)
REASON CONGRESS AUTHORIZED STATE/FEDERAL PARTNERSHIP
THROUGH SPRE AND WHY IT MUST CONTINUE
Federal government spends approximately $30 billion annually on student financial
assistance (Pell grants and student loans), which represents 75% of all such aid in the
nation. Congressional hearings in 1990 uncovered widespread waste, fraud, and
abuse in the use of HEA Title IV funds for student assistance that was enriching
some school owners and institutions at the expense of needy students and the
taxpayers.
Bipartisan Congressional effort to correct abuses resulted in 1992 amendments to the
Higher Education Act creating Federal/State partnership-SPRE (Part H, Subpart 1)-
to monitor use of student assistance funds and eliminate waste, fraud, and abuse.
Under the SPRE program, only institutions with high student-loan default rates. Pell
grant abuses, or heavy reliance on Federal student aid funds, or those that are
suspected of fraud are referred by the U.S. Secretary of Education to a State
Postsecondary Review Entity (SPRE) for fiirther examination. (In New York State,
for example, the Governor designated the State Education Department as
New York's SPRE.)
Congress appropriated funds in 1993 and 1994 for SPRE's to initiate state planning
for conducting SPRE reviews when requested by the U.S. Secretary of Education.
(Standards were developed by each designated state entity in consultation with the
colleges and schools in that state, and SPRE staff were selected and trained in those
states.)
In spring 1995, New York and 6 other states with SPRE plans acceptable to USDE
initiated SPRE reviews at 147 institutions identified by the U.S. Secretary of
Education for their unusual patterns of using HEA Title IV student assistance funds
(a small percentage of the institutions in those states):
• 61% are proprietary (for-profit) institutions
• 28% are private (not-for-profit) institutions
• 11% are public institutions
153
6. Some Washington-based higher education associations have mounted an attack on
this model Federal/State partnership, claiming it represents excessive governmental
intrusion. However
• Institutions do not have to accept the $30 billion in taxpayers' money if they
are unwilling to be accountable to the public for its use.
• Only institutions showing unusual patterns of use are referred to their state
entity for further examination; the vast majority of institutions are not
affected.
• SPRE law does not require colleges and universities to produce any
information that is not already required by other Federal statutes.
7. Some critics have confused USDE's recertification of institutions eligible to receive
Titie rv funds with tiie SPRE program, claiming that SPRE will require all
institutions to be reviewed. This is not correct. USDE periodically recertifies all
institutions; SPRE reviews are conducted at only the small percentage of certified
institiitions that show unusual patterns of using Titie IV funds.
8. SPRE has barely gotten off the ground. This bipartisan creation must not be killed.
Who will protect the taxpayers' $30 billion? Not the Federal government alone,
which has no mechanism for conducting such reviews effectively. And certainly not
the private, accrediting associations, which are themselves the creations of the
institutions now receiving the $30 billion!
9. Congress should appropriate $20 million in FY 96 for its SPRE program to get off
the ground. This will be one of the most cost-effective steps of the new Congress ~
protecting $30 billion at a cost of less than one-tenth of one percent of that amount.
10. As the SPRE program succeeds and shoddy institutions shut down, accountability will
increase and the need for SPRE reviews will decline. As a result, tiie cost of SPRE
will become an even smaller fraction of Uie billions being protected.
OBJECTIVE
That the State Postsecondary Review Program authorized by the 1992 amendments to the
Higher Education Act, Title IV, Part H, Subpart 1, shall receive an appropriation of
$20 million for Fiscal Year 1996.
92-498 96-6
154
Senate Panmnent SubcemmittM
M ImcstigatioK
EXWBIT # ^
URGENT CONFIDENTIAL MEMORANDUM
THIS DOCUMENT IS TO SHARED WITH NO ONE OTHER THAN THOSE TO WHOM FT IS ADDRESSED
AND HAS NOT BEEN PRESERVED ON EITHER FLOPPY OR HARD DRIVE
DATE; 7/14/94
TO: AbrahMn, Serbia, Bamardo, Akz. and Gonzalo
SUBJECT: Carraot Rcfoads
As you are each aware danng tbe petiod between July 1, 1993 and Jane 30. 1994. because of lADE's ux lieos and oUier
financial coostcamts. LADE paid only a very small percentace uf (be refuads acaally due die Pell Gnat program (lunng ihu
period. Tbe actual amoont paid in refonds daring tbis period va3 only $294^66 for tbe entire award year
As you are also aware, during Ibis same period between 7/l/9:-> and 6/3094 in otxler to increase casb flow we eliminated a
number of cbeclcs and balancrt wbidi allowed cbecks to print v/iucfa would not normally bave printed and/or been deposited
into lADE's general And. Daring ibis period for example:
a. sudena were transmitted to RCM's system and cbecks were printed based on "scheduled" razber than "actual" starts.
Under tbe prior policy, we wailed til fWe days after tfao swdent had been emtjUed to sansmit data sod print cfaedcs:
b. in sooke intUDces smdeu data was muMmitinri and checks were primed based on estimated income and tax data
laiber than actual tax returns data. Under tbe prior policy data was not tnatanined and checks were not printed until
tfter die tax i«tum, it Sled, was actually received; aitd
c. PeD dbecks wen printed eves before it was confinned (bat ESAR's bad been agaH by tbe student or other reqaired
Under the prior policy we unfiimed that ESAR's were signed phor to dK check being
Relaxing previously atiiting prooedom aUowed lADE to significantly increase casb Qow in ihe short nn However, in tbe
kmg run. liie cbanget dtamattcaHy increase itie amount of refimds doe. For example, many of (be students for whom we
printed and deposited checks, should never bave received any Pejl funds at an. CooseqocnUy. as lOon as tbe drop information
is posted for tbete studenis, we will be forced to pay back ALL of the money we received for them. As I warned when
lADE's tauot management first decided to do tbu. tbe long lom implications for lefonds owed bas been dramatic.
1. As of June 30, 1994 tbe total amount actnally '■ffoxh^" as doe in teftmds U SljmAM.
2. TVre are $364J«M in lOaaooai reAaxb wUcb were posted to ibe system as paid on March 8, 1994 when Bany
Qasaer was conducting the most recent faietnial awfit bat which in fact have never been deposited. KCM bas
repeatedly asked ns to provide the deposit sUps on these refund checks and reviews our bonk statements on a
monthly basis to determine if the cbeciu have cleared. It should be noted that tte checks for these refunds were
drawn oo banks with which we no k»ger do business, it is cnneiiUy impossible for os to deposit these checks into
the Fedoal funds acooont. Given the Bxe of recent calls from ROM. I expea it win be gnly a matter of a few more
days ROkl. in orter to prxea its own cretfibiUty with the Depanment of Educaooa will delete these refunds from
tbe system. This will inaease the Refimds Due 'appearing' on tbe system to $1,442.M4.
3. In addition to those refunds appearing oo tbe system, there are approximately 1,607 students who are oo-sbows.
withdrawals, trrminaiions, etc who have not been pooed to tbe ROM system as oo loager enrolled. Approximately
7S% of lADE's tudent's wfao drop trigger refunds. lu mm. die average refimd for due for each student for wbooi
a refimd is triggered Is approximaiely S859. As such, diese snideMS when posted will create approximately
S1.01S.310 in Mlditiooa] refonds. i.e., 1.607 x .75 x 8.S9 = 1.03S.31O
155
Tbe total projected amount of refunds xmaUy due as oT June 30. 1994, Tvbict includes botb posted and non-posted
5. The anonal projected amoant of refunds due for the month of July 1994 and for eacb montta thereafter, anumine
wt iTturn to ttw prior check urnittng tattmmr^ (mc a. b and c abo^\ will be approximately $140,000 per
month.
6. These reftmd totals tmtil paid will alto aeate excess cash oo hand in the ejuct same amount as the lefvsds due.
It should be noted that unpaid refimds and excess cash on hand are the two most common reasons for the Department
ic place schools on leimbarsement. If the Depanmem were to take such action on titese grounds it woi-ld be almost
impossitde for us to get it lifted even if we sued.
Mavmg summaiized the problem, I would propose the following potential solubons:
A. Only available solotion is to pay ref\iods. Real issue is bow. The previously posted $1,07M9S is ifa« most
iinrp«-/<ia«» priority since these amounts are currently showing as due end will affect our excess cash on hand until
it is fully paid and which would be very easy to spr.i in a review or audit Assuming available funds. I would
suggest the following:
L po6t S900,000 in refonds paid at the end of July 1994 and actually deposit S4S0.000 at diat amoum at thai
ii. deposit the addiUoDal $430,000 the second week August 1994 and, during the last week in August, post the
lemaising $178,498 in refiinds as paid to the system and actually deposit die checks at that tune;
iii. also dating the last week in August, re-post as paid and actually d^osit the $364,166 wbicfa shows as
previously paid but was never deposited on 8/31/94 so it clears in September. It should be noted, however,
that sboold RGM as predicted delete the prio' postings which show these funds as paid, we \o9uld need to
pay it soooer since the hnplicatioos for exce(.< cash on hand would be sigiuflcant;
iv by September 1, 1994 approximately $280,0(0 in addinonal refunds due should have accroed. While the
appearance of these reArnds can be delayed until then, delaying posting much longer will leave us with the
same probiem we currently face. My advice therefor is that if financially possible these refunds also be
paid by the end of September 1994.
V. daring the six month period between 10/1/94 ;ind 3/31/95 we should post nne-sinb (1/6) of the drops 1.607
drops which have not yet been posted and paying any associated refunds. This should work out to an
addidooal 268 drops showing up per month and should add about $172,532 per month in refunds during
the penod beweeo 10/1/94 and 3/31/95. Added to projected refunds of about $140,000 per month, total
refund payments during diis month would total about $312J52.
Aocofding to the propoaed payment schedule the monthly lefiind payments (txx postings, but actual deposits) would
be as follows: (The mmber is die momb)
7 s $4SM00 8 a S62MM 9 = $<44,166 10 * S3U452 11 i: S312452 12 « S312452
1-S312^S2 2 -$312452 3 a $312452 4 . $M«.000 5 a $140,000 6 . $140,000
Larger payment are deliberately scheduled earlier in the award year both because of the urgency of getting these paid
but also because cash fkTw is greatest between July and Sq)tember, reduces somcwhai between (October and Match,
and then dedines slgnificandy between April and June.
156
It itaould be noted that it may be possible to move some of tbese payments and postings back by as mucfa as two
10 four weeks. However, die greater tbe delay <bc greater risk we ran in terms of audits, excess casti, reunbursemem
and/or havinc our aid eligibility and/or bceose to operate tcrmmaied. Perhaps as stgnificaDtJy, txicausc RGM is
alao required to undergo Fadcral andlts, RGM has thruterwd that It migbt be forced to eliminate lADE't
ablUty to post its own refonda. If this w*r* to hafipen, w* would actually have to provide deposits slips to
RGM for aach refund made and wait until they had the opportanity to post the rcfoiMl as paid before tt would
show on th« system. This would totally eliminate our ability to post refunds as paid before they really wtr*.
The hnplications for our ablUty to quickly "Bz" things during an audit are obvious.
As an IMPORTANT aside, in order to prevent the appearance of excess cash on hand, it i$ also very important that
lAOE not draw down large amounts of PeU fuzxls more ttian about five days from the end of cacti month and that
we deliberately request cash whidi is LESS dian the checks we bave printed for the month. Tbe amount we UNDER
REQUEST should be tbe amount appearing on tbe refuods due report. For examjrfe if the refunds due report at tbe
end of July 1994 indicated that $178,498 was due in tefdnds, we should REDUCE the amount of our catJi request
for the month of July by at least that amount Reports can be generated which will give us a tnore accuraut
indicatioo of by bow nmch we should under request funds. The amount of (he under request however could be
obtamed at die start of tlie foUowing month
Potential Result If Not Camcit&
lAOE will be required m undergo what are now annually required smdent aid audits and will, as we bave alre:id>-
beeo admonished by tbe Nmm Committee, will be required to provide AUDITED FINANCIAL statements. These
audits ceopkd with die audited fmandfll statements will, given tbe auditor's familiarity with me RGM systetn, reveal
die unpaid refunds. Even if we retamed an auditor ■■rfamiliiir with RGM, tlie refunds wouki either be discovered
during ttie file review or wookl be discovered when the auditor, as required by Federal law, met with RGM In fan,
all an audtior would bave to do at this point to discover tbe unpaid nsfunds would be to look at our bank statements
for tbe period between 7/1/93 and 6/30/94. Tbe statenisnt would show no refund deposits except for S2*i,866 for
die entire award year. Ihey would show only Federal Fimds transfers. Given me prior response of the US
Department ol Education and ACCET's prior cooceriU regarding our past refund problems. They ui.Hjld almost
cenainly move to revoke aid eligibility and accreditaii(« if u were discovered diat we had failed to pay refunds after
convincing them that we bad solved otir prior problems. Frankly, even once die refunds are paid, they are already
late. As such, die tonger we wait to pay tbe refunds the greater die nsk to L^E Our biggest dilemma is that
diougb we could once again relax check ptinbng procedures to generate tnore income in order to pay die 93-94
reftiads, diis would only cteaie tnore refunds next year and make the problem worse assuming we could hide U for
another year which, frankly, we can' L Frankly, in light of die Nunn mvesbgatioD, if diey discovered and could pruve
diat lADE had dehberately bidden refunds and provided false infotination to Congress. L^E's senior management
could face criminal prosecotioa I say diis not to scare ycu, but to point oat as I bave beo£re that we have to fix
tfaia problem before it is discovered by some outside agency.
157
OR
\ginaL
Senate Permanent Subcommitt^
«n ln»«tigations
EXHIBIT # 5 c
TRANSCRIPT OF VIDEOTAPE
HEARING ON ABUSES IN FEDERAL STUDENT GRANT PROGRAMS
WEDNESDAY, JULY 12, 1995
United States Senate
Permanent Subcommittee on Investigations
Committee on Governmental Affairs
Washington, D.C
158
Mr. Gelber. Look at that paragraph, please. It says,
2 "Also during the last week in August, Ripost has paid"--
3 Mr. Williams. Right.
4 Mr. Gelber. --"and actually deposited the $364,000."
5 Mr. Williams. Right, meaning that it had not
previously actually been deposited.
Mr. Gelber. I mean, let's be straight here. On July
14th of '94, you didn't need one more drop of information to
know what was going on, because just the fact that they
10 weren' t--they weren't depositing things they were posting
11 tells you these guys were attempting to defraud anybody who
12 would be looking at the accounting of lADE. Now--
13 Mr. Williams. My comment at the time--my comment at
14 the time was that as- -I used to be a program reviewer, and
15 my comment was I believe that the current evidence would
16 provide substantial indication of not only improper
17 practices but an intent to defraud, euid the quicker you fix
18 it, the better off you are.
19 Mr. Gelber. I guess my question to you is: At the
20 time you wrote this, sir, you knew they were committing- -you
21 believed they were committing a crime?
22 Mr. Williams. I--
23 Mr. Gelber. Think about it.
24 Mr. Williams. I'll amswer it honestly. At the time--I
25 have to answer it honestly, anyway. I'm under oath.
WuhiofToo. O C 20002
159
Mr. Gelber. That's the--
2 Mr. Williams. At the time, I was relatively--!' d be a
3 moron and I wouldn't be a nationally known aid administrator
if I didn't know that they were committing- -or were almost
5 certain that at least one or more of the owners was
6 committing a crime. The fact of the matter is, though,
knowing that, I deliberately chose not--even though I
implied or indicated that there were problems, I
9 deliberately avoided asking any question that would give me
10 an absolute answer that fraud had occurred. Because if that
had happened, I would have been required- -and I would have--
12 I would have been required to notify the department
13 directly. And I probably would have done it anonymously,
14 but if I had- -I chose to remain ignorant deliberately.
15 Mr. Gelber. Mr. Williams, you would agree with me that
16 by putting- -by posting refunds that were not deposited, by
17 creating a false trail, an intentionally false trail- -it
18 doesn't really matter whether it's Congress or State or
19 Federal educational oversight groups- -people are going to be
20 looking, and the purpose of all this effort was to defraud,
21 to mislead, all those State and Federal agencies, whether
22 it's the Senate, whether it's the House, or whether it's the
23 Department of Education or the State oversight.
24 Mr. Williams. I believe that, in particular, Sergio's
— 25 activities as relates to failing to deposit checks would had
160
been posted to the system, in terms of ESARs that had--
checks that were not supposed to have been deposited that
suddenly ended up being deposited, that, yes, in fact, that
intent was to defraud. That is very clear.
Mr. Gelber. Now--
Mr. Williams. If it were not tor my ability to have
gotten them off the first time or the subsequent time, they
would have ended up closing.
Mr. Gelber. We're not going to go on to what the
Stofenmachers made in this institution or how--
Mr. Williams. Oh, absolute--!-- judging by some of the
information that we've gotten after the fact, very clearly
the Stofenmachers greatly abused, greatly abused. The
salaries were ridiculous, the car payments, the cellular
phones, the dinners. Mark aind I have discussed all of
those. Absolutely.
Mr. Gelber. This wasn't behind in refunds anymore.
This was presenting false statements, false notices, false
information to a third party or, in fact, from your own
institution to an arm of the Federal Government, to the
Department of Education, or to whomever was looking over
lADE's shoulders. So I guess my question is: You testified
a moment ago that you regret not going to criminal
authorities and saying a crime is--
Mr. Williams. I also regret not bringing it to the
161
attention of the department. In effect- -and in hindsight,
in effect, my delay in both resigning and my failure to
bring it to the attention of the department, in effect,
ended up still costing the same number of students
enrollment, still cost lADE's employees their jobs, and at
the same time, because of the delay, cost the Federal
Government additional funds which may or may not ever be
recovered. And for that, I regret.
Mr. Webster. Were any of the campus financial aid
directors instructed not to post attendance or grade
information?
Mr. Williams. During the period that Sergio had
indicated- -during the period that Sergio was not writing
checks and not authorizing checks to be printed, the- -at
one- -I think we discussed this before. At one point when
they were briefly behind on refunds--and I don't remember
the date, but we had informed the campuses- -we had informed
the campuses that you might as well catch up on your other
work, there is no reason to post refunds because Sergio's
not authorizing any payments to be made .
«mwoeo..iie.
. DC mm
162
S«Mi« PaniMiiert SubammitlM
M '
OWBIT*.
6-1-95
To: Mark Webster
From: Amaldo Sanchez
I'm taking this opportunity to inform you that the day ACCET arrived at the Oxnard campus back in
1 993, Sergio Stofenmarcher instructed me to go to the tool room in the automotive shop, where he have had
someone connect the wires from the fax machine to be used as a regular telephone number, for the purpose
of been answer when ACCET personal called and the persons that Sergio designated, was supposed to
answer, in order to give the ACCET inspectors a good placement report of the stiidcnt(s) that they were
inquiring about, this particular students had never been placed by AIDE
163
Senate Permanent Subcommif»?e
M Inmtigations
EXHIBIT # 8
AFFIDAVIT
-^ JORGE E. SHEPPARD
My name is Jorge E. Sb«ppaf3. I live at 5738 Whitsett Avenue, Apartment 302,
North Hollywood, California. I am originally from Peru and graduated from the University of
Lima with a degree in business administration. I immigrated to the U.S. in 1 988 and am now
a legal resident.
On June 25, 1990, I applied for an Education Clerk position with lADE at the
Southgate campus and was hired by Gus Guerra, the Director of Operations. My initial duties
consisted of filing education records, but later that year they were expanded to include
counseling studen^ taking care of education records, and signing counseling forms. In
December 1 99», I was tr^ferred to the North Hollywood campus, where I served as the
director until July 195J. "Q^ position was very stressful - there weren't enough employees
and I had to work 14-^^ours a day to make up for this deficiency - and, as a result, Sergio
Stofenmacher agreed to move me to the corporate headquarters, where I was given a job
helping the Compliance Director, Luis Marices
Initially, I didn't do much in this position, since lADE was expecting a visit from the
Accrediting Council for Continuing Education and Training (ACCET) and all that was being
done was checking recor4s to^ipsure that the school was complying with ACCET regulations.
However, in August 199^1 was put in charge of checking placement records and started
calling the employers listed on them to verify the employment status of students who had
completed a program of instruction at LADE. I found that many of the records at the Santa
Ana campus were fraudulent, that is, when contacted, the employers said they never heard of
the person who was listed as having been placed with thenL I brought this matter to Sergio's
attention and he terminated the responsible Santa Ana campus placement counselors.
In October 1992, lADE was placed on reimbursement by the Department of Education.
I became familiar with this siniation because I worked on preparing the reports required by
the Department in order for lADE to continue to receive its student financial aid fiinds. 1
believe that lADE was placed on reimbunement because of complaints fitsm Southgate
campus students regarding constant changes in the instructors and the poor quality of the
training provided. Indeed, reflecting these problems, during 1990 and 1991 the Southgate
campus had a number of different directors. Sarah Echea, who was the director at the time I
was hired, left in September or October 1990 because of her inability to do anything about
the shortages of books and other course materials. Her replacement was Jacob Ocampo, who
left in just a couple of months because he too was unable to resolve students' complaints.
Next was Rodrigo Oleas, who also lasted just a few months, leaving suddenly in June 1991.
In March 1993, I became Director of the Audit Team, which consisted of six
"auditors" (they were neither professional auditors nor did they necessarily have specific
accounting background or experience), whose job was to insure that all education records
complied with applicable regulations. In connection with this new responsibility, I asked
Ken Williams, lADE's Financial Aid Director, to help me understand the school's financial
164
aid record keeping procedures. After Ken provided this explanation, including showing mc
the computerized financial aid master sheets maintained on each student, 1 decided to
reinforce what I had learned by printing out ten master sheets and comparing them with the
corresponding education records. 1 discovered that some of the financial aid records didn't
match with the education records as they should have, so I did another run, comparing 100
financial aid master sheets with the corresponding education records. In this case, I found
about 20 that didn't match; and, specifically, that the master sheets in these instances showed
students to have been enrolled much longer than what was shown on the education records.
I showed these discrepancies to Gus Guerra, who agreed diat something appeared to
be wrong and, after calling a meeting of all the department heads to discuss this situation,
concluded that proper procedures were not being followed in posting records of students who
had withdrawn or dropped out. The proper procedures were that when a student withdrew or
dropped out, staff at tfie concerned campus should have recorded the last day of attendance,
filled out a counseling form, and forwarded the latter to lADE corporate headquarters. At
headquarters, the counseling form and the information on it should have been posted in the
computer record-keeping system and, if necessary, should have been used to calculate any
applicable refiinds. The student's education records were also supposed to be sent to
corporate headquarters, to be filed in a designated storage cabinet
In April or May 1993, Gus told Sergio about this problem. Sergio became visibly
nervous, but insisted that the figures on the master sheet were correct and that the problem
was not with them but my failure to follow established procedures. I checked my
department's procedures and, after finding that they had been properly followed, initiated an
audit of the entire record-keeping process because I suspected that someone outside my
department was changing information in the records, . This audit led to the data entry
department, where Taimi Aleman and Maria McFariane worked, and some of my suspicions
began to be confirmed when I overheard Sergio and Taimi complaining that Alejandia Hull,
the person responsible for collecting and filing the education records fit)m the individual
campuses, was not giving all the education drop files to Taimi to kvkw. What struck me
about this was that it simply didn't make sense, since it was the my department's job to audit
the drop files for accuracy and, therefore, I could see no reason why Taimi would want to
review them.
Soon thereafter, my suspicions were completely confirmed when, in connection with
an impending audit by the California Coundl on Postsecondary and Vocational Education
(CCPVE), I entered Taimi's office to look for some drop files and came upon boxes of
education records that should have been filed in the cabinets designated for this purpose.
Taimi, who had been on vacation when I entered her office, later told me that the records
were there because she was checking the amount of Pell Grant refunds due and amending
those records that weren't correct I knew this was not true because I had seen all the files
before Taimi got them and was specifically aware of many of the students' status and/or the
related informarion on them. In examining these records, 1 found that Taimi had routinely
changed them and the corresponding master sheet to reflect more credits than the students had
165
actually completed - for example, the record would show that a student had completed 1 8
credits instead of the 10 initially listed. I also discovered that Taimi had fabricated tests to
put in the student education files to make them appear more authentic. These actions by
Taimi served two purposes: they helped lower lADE's refund obligation; and, they extended
the student's enrollment status, which made the student eligible for an additional Pell Grant
payment
When I told Sergio about what I had found, he said he would correct the problems I'd
identified. However, while he did make some changes, as I was reviewing some education
files a short time later, I discovered that Taimi was still taking the records and altering the
credits and attendance on the master sheet, after I had verified this information and placed the
records in the designated file cabinets. Furthermore, when Sergio realized that the drop form
filed at the individual campus could still be used to show the inconsistencies in the recortls
altered at the corporate headquarters, he changed the procedure so that it would not be posted
at the campus until after headquarters personnel had had a chance to alter it
These problems and the failure to correct them were the focus of a July 1993 meeting
attended by Sergio, Alex, and Bernardo Stofemnacher and Gonzalo Freixes (the General
Counsel), where August© Pensajoff (lADE's Systems Director) and Gus went over this
situation and said to those present that Sergio could not continue to have records changed
because if he did, everyone could lose their jobs. (I was in an adjacent room and oveiiieard
the entire disoission.) Although the record changing activity stopped for a while after this
meeting, in early 1994 I began to notice that education drop files were missing from time to
time. When I looked into this fiirther I once again found the same kind of thing happening as
before; for example, I came upon an instance involving a student that reenrolled after having
dropped out earlier, whose records showed changes that reflected more credits and a longer
period of attendance than were actually completed. To the best of my knowledge, this Idnd
of activity is still continuing.
I also have personal knowledge of the following:
- Ken Williams is aware of the records-changing problems and at one point told
Sergio that if it didn't stop, he was going to report it to the Department of Education. -f -r /a«^
^ -______^^ ^^ ^^^^ ^— ^-^ u^
\ BASA exists only to emplnv illegal aliens 3rr>warri the end of November 1993, T ^jxX,
someone at lADE infomied the U.S. Iinmigration and Naturalization Service (INS) about *c^^/>^<^
illegal aliens working at BASA, prompting an INS investigation that has resulted in L7-^
deponation proceedings against a number of them. '^**^^^ ^
have read, reviewed, and initialed each page of this statement consisting of four pages, and I
166
affirm, to the best of my knowledge, bdief, and recollection, that the statements contained
herein are true and correct.
Sworn to and subscribed before me this
H_ day of Vi£^e*U»e^^ . 1994.
Notary Public
My Commission expires:
^ « i I I t ^^,1^^,
OFFICIAL NOTABYSEAt
LOSAHoeiEseowrrv
-^^^^^rn^rn
167
Senate Permanent Subcomnittte*
Ml Investigatioas
AFFIDAVIT "«»"*
OF
AUGUSTO V. GUERRA
My name is Augusto (Gus) V. Guerra. I live at 325 N. Garfield Ave, Alhambra,
California. I am originally from Lima, Peru, and immigrated to the United States on July 3,
1981 and was granted U. S. Citizenship in 1988. I began working for National Technical
Schools (NTS) ooon after my arrival. O"^ APii.\(_ :2.V_ iPiS'Z-. Qo,
I begin work for lADE on August 1, 1985. LADE is owned and operated by
Abraham StoSenmacher and his three sons, Bemardo, Alejandro and Sergio Stofifenmacher.
Bernardo and Abraham initially wanted me to help them obtain accrediumon from the
National Association of Trade and Technical Schools (NATTS). I had wiperience along these /^
lines fix)m my work at NTS, but also sought the assistance of BSSuonzales, owner of Cni
RGM Enterprises, whom I have known since 19^. (RGM was LADE's loan servicer and still
maintains the school's studeni' financial aid data.) The StojT'enmachers initially didn't (XCy
understand why they needed to be accredited. With help fh)m Gonzales, I gradually
explained to the Stofenmachers the need for and the benefits of accreditation and then started
the process to obtain iL
When I started at lADE, it was a new school and the operation was very small. At
the time, lADE's management consisted of Abraham, Alejandro, and Bemardo Stofenmacher
and a son-in-law, Daniel Levy. While the school was small it was still difficult to get
anything done because Abraham, Alejandro, and Bemardo collectively had to approve
e^'e^ything and disagreements among them were common. At one point in early 1987,
Abraham simply told me to submit an application to NATTS, even though 1 warned him that
much more information was required in order to be successful. Later, on May 5, 1987
NATTS conducted an accreditation site visit at L\DE, for which L\DE was obviously ill-
prepared, and was thus turned down. NATTS provided a list of areas L\DE needed to work
on in order to qualify for accreditation, but L^E's September 1987 response to these
recommendations was unacceptable and the school was never accredited by NATTS.
At about the same time, a close friend, Murray Cohen wanted to start USA Schools
and asked me to come to work for him and help with the accreditation process. Because of
the problems I had working with the Stofenmachers collectively approving everything, I
resigned from L^.DE and began working for USA Schools in October 1987. This job,
however, lasted for only about a year, in large part because of the stress 1 was undergoing as
a result of mantal problems. I left USA schools in October, 1988. Q^
Shortly after I left USA Schools, Sergio called me unexpectedly and said he knew I
had gone through some problems and could have my job at LADE back if I wanted it. I was
inten'iewed by Abraham and Bemardo, who said that they wanted me to work on the
administration of the rehabilitation students program and L\DE's new accreditation package.
I accepted the offer and started on October 23, 1988.
To begin the process of applying for accreditation, 1 read the Accrediting Council for
168
Continuing Education and Training (ACCET) requirements and attended some workshops
conducted by Debbie DeVries, who at that time was an ACCET employee,. Over the next
several months, I worked closely with Bemardo on the application package. ACCET ^IV
approved the application and visited lADE in March 1989. Abraham, Bemardo, 'Alejandro, ^
Hill niiiiii I 1 I "! were present during this visit On July 15, 1989 ACCET approved their
accreditation and in August lADE submitted its accreditation/certificauon package to the U.S.
Department of Education. We worked closely with Joe Summerville, a Branch Chief in the
Department's Institutional Participation and Oversight Ser\'ice division in Washington, DC,
during this process and in October, lADE was approved. The first class to participate in Title
rv programs started on October 16, 1989.
In January 1 990, 1 was promoted to the position of Director of Operations.
Additionally, I contracted with the California Council for Postsecondary and Vocational
Education to help them conduct reviews at other proprietary schools.
I first began to be concerned that things weren't right at lADE when, on several
occasions in 1991-1992, instnictors fkim the Santa Ana and Oxnard campuses asked me why
some students in their classes couldn't read or write in English. 1 felt this was at least
partially due to improper screening on die Wondcriic ability-to-benefit test and recalled that in
1991 a number of test administrators - e.g., Jaime Feinberg, Eduardo Victoria, and Pedro
Velasco - were hired, who I felt weren't qualified to hold such a position. In 1992, through
an audit by the Department of Education IG, I learned that lADE test administrators were
using inappropriately low cut-off scores, tfiereby enabling unqualified students to enroll. The
minimum acceptable score for the Wonderlic ability-to-benefit test was 15 for computer
courses, 13 for automobile mechanic courses, but LADE was using a minimum passing score
of 10 for all the tests. I asked Abraham Stofeninacher about this on at least three occasions
in 1992. He told me that the ability-to-benefit regulations were being followed. After the IG
audit, l*j1ii iImiii put out a memo specifying that the proper minimum passing scores were
Aose set by Wonderlic.
In 1991 an instructor at die El Monte campus, Kevin Shaw, told me about an ESL
student — Nuno (1 don't remember his last name) - who wasn't able to read or write Spanish
or English. Kevin asked me what to do about this, so I counseled Nuno and, despite his pleas
to be allowed to remain in the class, removed him. Nuno told me that he had taken the
ability-to-benefit test three times, had never passed it, but had begged to be admitted. The
school director, Gladys Canovil, said that she went to Sergio and explained the situation to
him and Sergio said to let him in. Nuno received Pell Grants while attending the ESL course.
^■c. Muw^ >-ja^ y«.i^-4>reci VrTT>^ -s:><fc& 3^.^ v-.ii[ se-^ -RD ^^v 'vtul-r \i-iew»".| V"^<;^''~-^ •
During ACCET's reaccreditation visit in May or June 1992, Maria McFarlane, who
worked as a placement coordinator, told me that she observed student placement records
being fabricated. As part of their reaccreditation process, the ACCET site team examined
student placement records The site team found from this examination that lADE's placement
figures failed to meet either ACCET or California's 70% requirement and that the record
keeping was inadequate. In response, Sergio asked Ken Williams, lADE's Financial Aid
W V^;m^ ,A>^a^^ \£^- ^ oya.v.,M^ Ow.TEC> Soi-^oVj - e^OCC&-<t/j
J
169
Director, and me to look into this, but our examination of placement records showed lADE
still failing to meet the 70% target by a wide margin; whereupon Sergio told us he'd take care
of it. Maria McFarlane told me diat about the same time as ACCET's reaccreditation visit
she observed Sergio, assisted by Lilly Saavera (the Los Angeles Campus Placement Director), f\(u
Taimi Aleman (a data entry clerk'^iiLXiiirini iiil iVhi), and Patricia Rivera (a records clerk), ^
fabricating placement records so tfie numbers showed a 70% placement rate. Maria told me
they did this, under Sergio's direction, by sending LVDE employees to the Bankruptcy Court
building to gather names of firms to use as places where school graduates were purportedly
working.
I also discovered that there were problems with the records of students who dropped
out of or withdrew from a course of study. I overheard Sergio say that tnany of the education
records were not correct and that they showed the students having attended fewer classes and
completing fewer education units than he (Sergio) claimed they did. Sergio assigned Taimi
Aleman the job of auditing all the records of students who dropped or withdrew, something I iM-i
didn't understand, since they had been previously audited by Jorge Shep^^ the Director of ■'
lADE's internal audit team. According to Jorge, Maria McFarlane told him that in 1992
Taimi routinely found records diat she said should reflect more credits than they did - for
example, that a certain student completed 18 credits instead of die 10 shown on thelecord -
and then changed the master sheet accordingly. Additionally, Jorge discovered from
examining some of these records tfiat it appeared that Taimi fabricated tests to put in the
student education files to make them appear more authentic.
Furthennorc, when I compared an education file brought to my attention by Gabriel
Ramirez (an lADE admissions representative) regarding a no-show (enrolled/never attended
classes) to the ROM computer master sheet, the latter showed that this student received a Pell
Grant disbursement. 1 double checked this with the computer record at the South Gate
campus, which confinned that the student never attended classes at lADE. After conferring
with Jorge Shepp^and reviewing about 100 noore student records covering a six -month If^
period beginning in May 1993, we found Aat 20 didnt match with education records. •'
Specifically, the master sheets in the student records in these instances showed students to
have been enrolled much longer than what was listed in die education records. I approached
Ken Williams about these problems late in 1993. He appeared to be upset that such activities
were going on. However, when Sergio found out tfiat Williams had been told, he became
upset with me, blaming me for instigating trouble for LM5E. ^€><t»vo uia^*":*!^ v-^cco
Cr^ A^c^,^ Ar^A^UtT XAJ^t^. p^
I have read, reviewed, and initialed each page of this statement consisting of five
pages, and I affirm, to the best of my knowledge, belief, and recollection, that the statements
contained herein are true and correct.
170
Augusto V. Guerra^
Sworn to and subscribed before me this
1\ day nf ^/jUMHfin' . 1994.
Notary Publifc
My Commission expires:
^ Commisac
LOSANOELESCOilKTY
1^ U I I I <■
Senate Penranent Subcomminee
171
Hnitcd Sates Senate
WASHINGTON. DC 20S10-6250
June 20. 1995
Ms. Mary Gibbons, Esquire
727 West Seventh Street. Suite 929
Los Angeles, California 90017
Dear Ms. Gibbons;
This is to notify you of the change in the date of the Pell Grant hearing. The new
date is July 12, 1995 at 9:30 a.m. This change was due to a conflict with other
Committee Members' schedules.
Just in case you have not received Mr. Bernardo Stofenmacher's subpoena for
testimony, enclosed please find another copy. AddtionaUy, if possible, please advise on
status of our latest document request
Sincerely.
^^r
R. Mark Webster
Staff Investigator to the Minority
Permanent Subcommittee
on Investigations
RMW:mw
cc; Phillip A. Trevino, Esquire
172
Law Otfic0a
MARY GIBBONS. ESQ.
B4 Routt 303. Suite 134
Tappan. New York 10983
(BOO) 346.6279
July 3, 1995
BY FACSIMILE TRANSMISSION
R. Mark Webster
Staff Investigator
Minority Subcommittee on Investigations
Committee on Governmental Affairs
United States Senate
Washington, D.C. 20510-6250
Dear Mr. Webster;
This letter will confirm our conversation regarding my acceptance, as counsel to
lADE American Schools (herein "lADE"), the subpoena which your office has issued for
the appearance of Bernardo Stofenmacher before the Senate Permanent
Subcommittee on Investigations of the Committee on Governmental Affairs of the U.S.
Senate, which was initially scheduled for June 1 , 1995, but which has subsequently
been continued to July 12, 1995. My acceptance of this subpoena in no way waives or
abrogates any of Mr. Stofenmacher's rights in regard to such subpoena, rather it is
solely for the purpose of avoiding the logistics of personal service.
Please be advised that, in light of the fact that the Federal Bureau of
Investigation, together wHth the Office of the United States Attorney for the Central
District of California, is conducting an investigation of lADE, Bernardo Stofenmacher,
as an officer of the corporation, will invoke his Fifth Amendment privilege against seif-
inaimination if called to testify as to any matters concerning lADE or the activities of its
officers and employees. In light of this fact, on behalf of Bernardo Stofenmacher, I am
requesting that your office waive his appearance in order that he might not be required
to travel from Los Angeles to Washington, DC. simply to invoke the privilege to which I
believe we agree he is entitled
Should your office determine not to waive Mr. Stofenmacher's appearance,
please be advised that I will appear with him at this hearing You have apprised me
that, pursuant to the "Rules of Procedure for Senate Permanent Subcommittee on
Investigations of the Committee on Governmental Affairs As Adopted", dated February
16, 1995, specifically Rule 8 thereof, the Subcommittee Chairman is authorized to seek
to preclude my appearance with Mr Stofenmacher m light of my representation of
lADE. It is my view that, should Mr. Stofenmacher be required to appear personally, he
would be entitled to appear with counsel of his choosing, and that your office could not
abrogate his Sixth Amendment ngnl to counsel In order to avoid an "eleventh-hour"
173
VDE Arnerican Schools
July 3. 199S
Page 2
dispute over this issue, please advise me if your office will agree, should Mr.
Stofenmacher be required to appear, that you would not raise any objection to my
appearing with him at this hearing. Should you intend to make such objection, I would
hope that you will notify me in sufficient time to afford an opportunity to litigate the
issue
Please note my new mailing address and telephone number above In that i
have just relocated, I do not yet have an established fax number, however should you
need to transmit any materials to me, please call and I will arrange to receive it Thank
you very much for your consideration and co-operation.
Mary Gibbons
174
Senats Pimtneirt SobcommRtM
on Imtsiigatioos
EMBIT* iL_
March 2. 1995
Roger \\'illianis. President
Accrediting Council for
Continuing Education & Training
600 East Main Street. Suite 1425
Riclimond, N'irginia 23219
Re: Issues raised in tlie Februan 3, 1995, ACCET team ^isit exit intenie«-
Dear President Williams:
Tliis correspondence ser\es as I.\DE .American Schools' interim response to issues related to "no-show "
students raised during the exit inteniew at tlie conclusion of the Februarv 3. 1995 unannounced \-isit b>
represeutati\es of the Commission. LADE .American Schools fulh' understands and appreciates that
nonnal Commission protocol dictates that tlie institution wait until tlie official re^•ie\^ report has been
issued prior to responding. Ho\ve\-er, given tlie seriousness of the matter in question and tlie apparent
"perception" of tlie review team as relates to tliis issue, the institution felt a strong obligation to respond
as quickh' as possible to tlie Commission's concerns. .As indicated, tliis response is soleh directed to those
aspects of tliis issue discussed b>- Commission representati\es during the exit. .As sucli. it is preliininan
in nature and in no way should be vie\^•ed b> tlie Commission as tliis institution's sole or fuial response
to this or oilier issues which max be raised at such time as tlie actual team repon ma\ be issued. Tlus
being said, let us begin to address tlie specific nature of this response.
We expect to ha\e completed witliin the next week or so a report entitled "Interim Response and
Correcti^ e Action Flan to Februarj 3, 1995 ACCET Team ^■isit". Tins repon will document and
e.^q^lain an unusual set of circumstances during a portion of the 1993-94 Federal aid avxard \ear. which
inadx enently resulted in a limited number of students \xho signed enrollment agreements but ne\er
began classes recei\ing Title W funds. Specificalh'. tlie interim response \x ill describe how an equalh
limited number of enrollment status reporting errors b> academic records clerks within I.ADE's Office of
Education unintentionall>- bxpassed a series of institutional controls designed to pre\eiit this t>pe problem
from occurring and how tliese same errors prevented tlie institution from determining tliat this problem
had occurred until it was brouglit to our attention b>- the \isiting team, hi addition, the response will
establish that:
a. immediatel> upon learning of the concern from tlie \isitiiig team. I.ADE .American Schools.
wrJiout being directed to do so b\ the Commission or ain other o\ ersiglit agenc> . contracted with
an outside CP.A to perfonn an expedited, independent audit related to this issue. Tliis audit has
now been completed, we are simph' waiting for tlie report to be issued before making full
restitution of any resulting liabilities:
175
Roger Uiliiams
lADE Schools Feb. '95 \isit
March 2, 1995; page 2
b. as indicated iii tlie preceding item, oiice tlie C?.\ submits his final audit report. LADE is prepared,
again of its ouii ^■oIition and concern for the integrity- of tlie Title IX aid programs, to make flill
and complete restitution to tlie U.S. Department of Education for the improperh expended funds.
Based on preliminar> indications from tlie auditor we expect tlie liability- to be appro>umateK-
S130.000. It sliould be noted that wliile this amount is not insignificant, it is less tlian one-tentli
of one percent of tlie total Title K aid funds received b>- tlie school for tlie period in question; and
c. despite tlie problem having been confined to the 1993-94 award year, tlie institution has
implemented additional modifications to its existing procedures and training for academic records
clerks and other Education Office staff to ensure that no such error occurs in the fiiture.
This being said, tliere is one otlier iinportain issue relating directly to tlie core concerns of the team
tnanbcrs wiiiditlie response «ill anempt to la\ to rest. The report will establish that despite a series of
unfortunate circumstances which appears, based on the e.xit interview, to ha\e lead tlie team to belie\-e
otlierwise. LADE made e\er> efifort to compI>- fiilh- with information requested b>- tlie members of the
team during tlie \Tsit Specifically . the report will document how tlie unannounced nature of the \isit. tlie
relati\eh- brief period of time spent on-she by tlie team (onl\' a little o\er six hours), tlie school's computer
s\ -stem being down during most of the \isit. llie unavailability of several canceled checks wliicli. as pan
of tlie bistitmion's fiscal > ear close ouL were at LADE's accountant's office on tlie day of tlie \isit created,
perhaps understandabh . tlie impression in the minds of the team tliat LADE was being less tlian ftilK
cooperati\e. Tliis impression, which was both clearU e\ident and directh expressed b> members of tlie
team during the exit interview . seems to have been furthered b\ two additional factors. Tlie first is the
faatliat. asthe Commission is well aware from numerous prior visits to LADE, files and related records
for inactive students are maintained at LADE's corporate office rather than at tlie school. Consequenth .
tliese documents, wliich represented tlie bulk of tlie documents requested b> ilie team, had to be pulled
from storage at tlie corporate office, sorted, boxed and delivered to tlie school.
.A second concern seems to ha\ e resuhed because of confusion regarding second-hand information
pro\-ided o\er tlie phone froin the coiporate office to LADE's Director of Student Financial .Assistance
wliile he w as on-site at the school for the team \-isit. That infonnation. wiiich w as belie\ed at the time
to be fiilh accurate, w as subsequentK conve> ed to members of the team. LADE w as later to discover,
however, tliat tlie information provided to tiie aid director, and subsequentK to the team, had been based
on an incorrect assumption b> suppon staff at the corporate office who phoned tlie school w itli the
information. SpecificalK. staff at the corporate
176
Roger Williams
UDE Schools Feb. "95 ^■isit
March 2, 1995; page 3
ofDce phoned L\DE personnel at tlie school indicatmg that fi\ e students for whom the team had requested
student aid infonnation were "not in tlie s\stern" and therefore must be "non-aid" studenu. Tliougli
L\DE personnel on-site for the \isit. quite understandabh . took tliis to mean that corporate support staff
had actualh searched student aid computer records and paper aid files for the fi\ e students, we
subsequenth learned that tliis was not tlie case. Instead, we discoxered. much to our disma\ . that staff
had simph looked the students up on the education s\ stem computers (wliich do not directh uiterface
with the student aid s\stem). disco\ered that tlie fi\e students were no-shows and. belie\"ing. ue now
know falseh. tliat such students could not ha\e receixed aid. bothered to look no ftirtlier. Tliis same staff
tlicnreponed the fi\e students to on-site personnel as "non-aid". Tliough tliree of tlie fixe students were
subsequenth- found to ha\e receixed aid when the Corporate .\id Director, at the request of the team,
ordered a complete records search of the automated student aid sxstem. tliis \xas not discoxered until a
little after 6:00 pm on Februar> 3. 1995. bx wliich tune the team had alreadx departed.
Despite our concern tliat tlie team max haxe mis-peroeixed the nature and scope of the problem as w ell
as I.AJDE's willingness to assist in tlie rexiew process. LADE in no wax beliexes tliat llie team acted
improperlx in tlie conduct of tlie xisit. Franklx . had the situation been rexersed and LADE personnel been
the ones conducting ths xisit. I am not at all certain that, gixen the same series of unfonunate
circumstances, xxe xx ould liaxe been nearlx as tolerant as tlie members of the e>cisting team. It is important
to note, hoxxexer. tliai the same factors w hich so frustrated the te.am during tlieir inquirx . i.e.. w aiting for
files from tlie corporate office, the school's automated student aid sxstem being doxx ii. tlie relatixelx brief
period alloxxed fortlie rex iexv. unintentional misiiifonnaiion from the corporate office, etc.. xvere equalK
frustrating to us. Indeed, gixen that the team at least knexx the specific nature of the concern they had
been sent to inxestigate. tlie exems of the day xxere m some ways ex en more frustrating for us.
.Again, in all candor, tlie perceptions draxxii bx- the team and stated during the exit inter^iexv w ere. for the
most pan. fairlx- arrixed at and perhaps quite logical gixen the circumstances which existed at the time
of tlie xisit Howexer. as the forthcoming interim response xx ill coiifinn. tlie "lacts" are far different than
the "perception". Tlie facts are that circumstances, rather than intent, prohibited us from uiitiallx
proxiding much of the data requested bx the team. .And. the faas are that LADE .American Schools, as
soon as tliis problem xxas discoxered. acted in a matter of days, rather than xxeeks or montlis. to identiiy
tlie cause and exient of the problem, to make ftill restitution to the L'.S. Department of Education for all
improperlx disbursed funds, and to place additional controls to ensure that such a breakdown in
institutional safeguards nexer occurs again.
Li addition to laxing out tlie nature of the original conccni and documenting its correction, the institution
also believes it important to comment regarding certain specific aspects of the complaint which
precipitated the unannounced xisit. LADE fullx- understands and appreciates the
177
Roger \\'illianis
lADE Schools Feb. "95 \isit
March 2, 1995; page 4
Commission's responsibilin to follow-up on an\ and all complaints associated witli tltis and other member
institutions. How e\ci-. the manner in which this problem appears to ha\e been brouglit to the attention
of the Commission continues to raise serious questions regarding tlte methods and moti\ es of the
disgruntled current or fonner emplo>ee whose complaint precipitated the \isit. Please consider the
following points:
Tliis person sent tlie Coirunission a cop> of a letter from California's Council for Private Postsecondar>-
and \'ocaiional Education (CPP\'E) wliich discussed onl> tlie alleged fuidings associated with a routine
re\iew of I.-\DE's ESL programs. Tlie disgruntled pam who fon\arded tliis item to the Commission
failed to send eitlier I.ADE's original or subsequent response to tlie CPPXT re\iew. It seems relativeh-
implausible tliat tlie part> in question had access to the CPP^T letter >et. did not ha\e access to these
otlier documents. It is clear that tlie part>- in question selev:ti^■eI^ chose only the documents w liich suited
liis her purpose — attempting to discredit the institution.
Indeed, w hen a representati\e of tlie re\iew team, at LADE's insistence, contacted CPP\'E official. .Tim
Henthoni. Mr. Henthoni confmned that. contrdr\to what was stated in tlie letter receixed b> .A.CCET.
I.AX)E had in fact proxided all refund related infonnation requested b> CPP^■E. Li a subsequent
discussions w ith \h-. Henthoni. which occurred on the Monda\- following the Commission \isit. he also
ejqsressed concern regarding n\o other related maners. The first concern was that, thougli the repon \\as
a maner of public record, it was sent without CPP^■E■E knowledge or consent. Tlie second, was that it
was sent w itliout accompaining institutional documents and correspondence necessar.- to place the report
in tlie proper conte.\i. h is CPP^■E's standard procedure to include all related documents w hen for^x ardmg
it's re\iew reports to other oversiglit agencies. Vou ma\. of course confinn these points w ith Mr.
Henthoni at (916) 3:2-2614.
I.\DE is e\ en more concerned regarding tlie issue of wiiy this part>- choose to bring this maner to the
aneniion of the Coitimission. prior to bringing it to tlie aneniion of I.-^lDE's senior management in order
to sohe the problem. .As I beliexe our prompt response to tliis issue demonstrates. LADE takes its Title
l\" aid program responsibilities. In can assure \ou. tliat on an issue of such importance. LADE would
lia\e moxed just as rapidl\ to resolve tliis issue if it had been brouglit to our anention b> an emplo\ ee as
we did when it was discovered b\ the Commission.
Perliaps most senousK . u e are concerned regarding a certain irony represented b> these circumstances.
LADE w as not infonned as to whether the pan>- wlio presented tliis complaint was known or did so
anon\mousl> . How e\ er. it is reasonable, based on the t>pes of documents w hich accompanied the
complaint, to assume that the disgruntled part>' was. or is. a member of
178
Roger ^^'iUialns
lADE Schools Feb. "9? Msit
March 2, 1995; page 5
I.ADE's Office of Education and or acted in collusion with current of fonner education ofTice staff. .A<-
this correspondence and the fortlicoming ititerim response "ill confirm. iiiad\cneiit enrollment status
reporting enors b\ staff in the Education Office are what origiiialh caused a limited number of no-sho\^
students to recei\e aid in the first place. .As sucL tlie iron>' is tliat the disgruntled pan> who created
and or contributed to tlie problem is tlie same pan> anempting to sliifi the blame to tlie insiitutioh. Tlie
feet of tlie maner is. as witli all postsecondar\ institutions, uistirutional checks, balances and controls onl>'
work as well as the personnel who implement them.
These concerns aside, howexer. I.ADE is simpK glad that tlie problem was brouglit to our attention and
has now been resohed. Tliougli we will obvioush disclosed the nature tliis fmding to tlie U.S.
Department of Education w hen we make restitution for the improperh' disbursed funds. LADE is well
aware tliat had tlie DepartmenL rather tlian tlie Cominission. been tlie first to disco\ered this concern prior
to LADE having identified and corrected tlie problem, the consequences could ha\e been quite severe.
Consequenth . in closing. I wish to extend iti> personal thanks, and that of LADE .American Schools, to
the members of tlie team, yourself and tlie Commission as a whole helping LADE to both identify and
nesoK'e this problem. N\'e ha\e incoiporated the input fi-om tliis visit as part of tlie learning process and
belie\-e this institution as been strengthened because of it.
Tliank >ou for the opportunity- to proxide tliis preliminary response. Should >ou haxe questions or wish
to discuss tliese issues, please feel free to contact me. .As indicated at pre\ioush . I fulh' expect to receive
tlie completed CP.A audit repon with tlie nexi w eek or so. at which time LADE w ill make fuial pa>inen;
of tlie anticipated liabilit> and forw ard llie completed "Interim Response and Co^recti^ e Action Plan
to Februani 3, 1995 ACCET Team Visit"
Sincerelv.
.Abraham Stofenmacher
President
179
S«Mte Permanent SubcommittM
on Investigations
aWBIT #____££_____
BET TZEDEK LEGAL SER\n[CES
us South Fiirftx Avenue, Suite 200. Lot Antetes, CaUforoii 90036 013)939^506
Fix: ai3)549-SU0
May 24, 1995
Mark Webster
United States Senate
Committee on Governmental Affairs
Chief Counsel to the Minority
Permanent Subcommittee on Investigations
Washington, D.C. 20510
Dear Mr. Webster:
I am sending you a copy of the written statement I mailed
today to Dan Gelber. As you know, I have also been trying to
collect declarations from students and former employees. As soon
as I can obtain the signed declarations from the students, I will
mail them to you. I have also spoken to a number of former
employees, all_of whom told me they have already been in touch with
you. Therefore, I aun not sending you amy new declarations from
former employees.
Please contact me if you find that the enclosed statement is
too long and/or if you feel any changes are necessary. As you
know, I will be on vacation from May 30 through June 14. I will be
in Washington, D.C. part of this time. You can leave a message for
me in Washington through June 1 at this number: (202) 265-7299.
After that time, you can leave a message for me at my office: (213)
549-5842 as I will be checking my messages periodically. If you
would like to make any changes and need me to sign a new statement,
I can come in to your offices while I'm in Washington.
I'm sorry I won't be able to attend the hearings, but I
appreciate your keeping me posted on your activities. I look
forward to receiving the hearing transcript and any other
information.
Thanks so much for your perseverance on this issue. Please
don't hesitate to call me if you need anything else.
Very truly yours,
BET TZEDEK LEGAL SERVICES
By: '\^ ;:— ^,-P
Deanne Loon in
Staff Attorney
L.^3-
180
BET TZEDEK LEGAL SERVICES
145 Samh Fiiriix Avoaie, Suiu 200, Lo« Aafeln, (Ulifbtaia 90036 (113) 939-0S06
WRITTEN STATEMENT OF BET TZEDEK LEGAL SERVICES
TO THE U.S. SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
The closvire of six Southern California ceunpuses of lADE
American Schools (lADE) in March 1995, and the subsec[uent
disappearance of the school's owners, left behind more than the
shattered euabitions of thouszmds of mostly Latino students striving
for better lives. The closvires also left taxpayers footing a bill
in the millions due to student loan and Pell grant fraud, an
expense that could have been avoided if the Depeurtment of
Education's regulations had been properly enforced.
The federal and state investigations that led to lADE's
closure alleged improper handling of grant funds, failure to
reimburse the government for loan and grant money and improper
verification of applicants, particularly in the English as a Second
Language (ESL) programs.
The warning signs of serious abuses at lADE were apparent long
before the 1995 closure. As a staff attorney with Bet Tzedek Legal
Services, a non-profit legal services organization which provides
free legal assistance to low-income individuals throughout the Los
Angeles area, I have been hearing complaints about lADE from
students and former employees for years.
Bet Tzedek has successfully advocated on behalf of many of
these students, helping them obtain funds to pay back loans mostly
from the school or from the state tuition recovery fund. For
example, in 1994, Bet Tzedek sued lADE on behalf of eleven former
students of lADE's automobile technician course. The complaint
alleged that lADE lured these students to the progreun with promises
of employment, quality hands-on training and "free" education
through readily available government funds.
Only after they enrolled and signed student loan and grant
documents did the students find that most of the promises made to
them were not true. Among other problems, the school offered
little or no equipment for hands-on training and students with
vastly different levels of ability and experience were merged into
the seune classes. Moreover, classes were inadequately supervised
and frequently interrupted so that students could sign loan
documents and other documents relating to financial assistance.
When the students inquired about withdrawing, they were told.
181
contrary to federal and state law, that even if they withdrew from
the school, they would still have to pay back the entire amount of
their loans.
Fortunately, these students were able to settle the case
satisfactorily before lADE closed. Many other students were not so
fortunate .
For example, last year I met with another group of Spanish-
speaking former students of lADE's automobile technician course.
This group had advocated strongly for themselves, complaining about
lADE to, among other agencies, the Los Angeles Consumer Affairs
Department and the California Council for Private and Postsecondary
Vocational Education. Representatives from these agencies met with
the students, but other than conducting a few on-site inspections
of lADE, failed to take any serious action against the school until
about five years after the students' graduation. By the time this
group contacted Bet Tzedek, the statute of limitations to sue or
even to file a complaint with the state for a refund had expired.
In the end, only lADE profited from the government funds and the
students are left saddled with debt, due to student loans from
which they received no benefit.
These students' plight is not unique. The Council in
California and the federal Depeurtment of Education received
countless complaints about lADE throughout the years. The
enforcement system simply took too long.
On the federal level, the enforcement responsibility for loan
and grant assistance lies with the Department of Education.
Specifically, in order to receive federal loans or grants, a school
must be authorized to offer the program by the state in which they
are located, must be accredited by a nationally recognized
accreditor approved by the Department, and must be certified and
determined to be eligible by the Department.
Lax enforcement of these regulations has allowed schools like
lADE to thrive despite mounting evidence of fraud and corruption.
Schools such as lADE can be extremely resilient in avoiding
sanctions and/ or closure by the government. For example, when lADE
began to feel pressure in the early 1990 's due to high default
rates in their student loan program, they simply ceased their
participation in the loan program and switched to offering Pell
grants only. This move allowed them to stay alive for at least
another three or four years.
In 1993, this Committee conducted hearings on Pell grant
fraud — the same issue that they face today. The hearing report
highlighted major abuses in the system including:
Schools that set tuition at artificially high levels;
Schools that disbursed funds to ineligible students;
Schools that paid brokers to recruit students; and
182
Schools that falsified grant documents.
lADE has been charged with nearly all of these violations and
Unfortunately, lADE is not alone. Even though the Department
and California's Council have caught up with some of the most
egregious offenders in the past few years, advocacy organizations
such as Bet Tzedek continue to hear regularly from victims of
financial aid abuse.
In fact, the problem probably is even greater than we are able
to track, primarily because recipients of Pell grant funds do not
have to pay the money back and therefore are less likely to seek
legal assistance than recipients of student loans. Although Pell
grant recipients often feel cheated, they are not facing the
monthly payments and harassment by collection agencies and
creditors that drive many loan recipients to seek assistance.
The human toll, of lax enforcement is great. Most of the
students who attend these schools are seeking better lives for
themselves and their faunilies. Their dreauns of upward mobility
through education are too often thwarted by unscrupulous schools
that leave them in debt and often unable to qualify for future
government assistance to attend legitimate schools.
Congress opened up federal aid progrzuns to vocational school
students, including students without high school diplomas, with the
goal of providing more equal access to education. This worthy goal
should not be lost in this debate. However, without proper
enforcement of the Department's regulations, equal access to
government aid becomes a fiction for all too many vocational school
students. We hope that these hearings, combined with previous
hearings and testimony compiled by this Committee, will sound an
alarm to the Department and other enforcement agencies, not to cut
off assistance for students, but to ensure that the system is
properly regulated.
DATED: May 25, 1995
Submitted By:
JEDEK LEGAL SERVICES
By:
i
^ L^V
Deanne Loonin
Staff Attorney
183
Senate Pemsnent SobcommittM
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193
Senate Penmneirt Subcommittee
UNITED STATES DEPARTMENT OF EDUCA
WASHINGTON. D.C. 20202-
R. Mark Webster
Investigator to the Minority
Permanent Subcommittee on Investigations
U.S. Senate
193 Russell Senate Office Building
Washington, DC 20510
.-fiWfP'T
'^Q 1995
Request for Federal Pell Grant program data,
American schools
including lADE
Dear Mr. Webster:
Enclosed are the data' reports you requested for 1989-90 through
1994-95. We selected all schools with Federal Pell Grant funding
equal to or greater than lADE American (026088) . The reports are
in descending order by funding level. The results are:
Year
lADE Funding
Rank
1989-90
$ 833,327
1404th
1990-91
$ 3,093,634
316th
1991-92
$ 10,383,991
30th
1992-93
$ 14,452,247
19th
1993-94
$ 16,459,224
15th
1994-95
$ 13,828,673
18th
Please note that the City University of New York's Federal Pell
Grant authorization is given by adding together Pell Institution
Numbers 002686 and 022222, beginning with school year 1991-92.
CUNY is the only school with an authorization in excess of
$99,999,999.
The data for 1994-95 are not yet complete. Schools funded at
$750,000 or cibove had a mandatory reporting period for 1994-95
which ended on June 15, 1995; all funded schools have a mandatory
reporting period ending August 15, 1995. In addition,
institutions have until September 30, 1995 to submit final
reports.
194
Should you have any questions or need additional information,
please let Jana Henderson of my staff (708-8698) know. Thank
you.
Sincerely,
Jeanne B . Saunders
Director, Application and Pell
Processing Systems Division
Program Systems Service
Enclosures (6)
Linda Paulsen
Michele Selvage '
Jana Henderson
195
Law Offices . ■■
K/IARY GIBBONS, ESQ. "" inwstljations
727 West 7th Street, Suite 929 ctuipiT it 37
Los Angeles, California 90017 tWUBII ff ,
(818) 980-5164 Fax: (818) 980-5164
May 16, 1995
BY FACSIMILE TRANSMISSION/ORIGINAL BY MAIL
R. Mark Webster
Staff Investigator
Minority Subcommittee on Investigations
Committee on Governmental Affairs
United States Senate
Washington, DC. 20510-6250
Dear Mr. Webster:
This letter will confirm our conversations regarding various aspects of the
ongoing investigation involving my client, lADE American Schools (herein "lADE").
Initially, your office issued a deposition subpoena directed to Mr. Bernardo
Stofenmacher on March 24, 1995, returnable on April 12, 1995. As outside counsel for
lADE American Schools, Mr Trevino and I agreed to accept service of such subpoena
on his behalf. I informed you that, in light of the fact that the Federal Bureau of
Investigation, together with the Office of the United States Attorney for the Central
District of California, is conducting an investigation of lADE, Bernardo Stofenmacher,
as an officer of the corporation, would invoke his Fifth Amendment privilege against
self-incrimination as to any inquiry concerning lADE or the activities of its officers and
employees. You agreed that, given his intention to invoke this privilege, it would not
be necessary for him to appear in person for a deposition in response to such
subpoena, nor would it be necessary for him to invoke the privilege on a question-by-
question basis.
On April 27, 1995, you requested that lADE produce, pursuant to your subpoena
of May 10, 1994 directed to lADE, documents identifying the students who participated
in the COTC citizenship training program since 1992. We are presently seeking to
identify the responsive materia's, which is a extremely difficult task at this juncture. As
you know, lADE has ceased operations and has filed for bankruptcy. Many company
documents were seized by the FBI and those which were not seized are being moved
to a central location due to the fact that various school locations have been closed, with
leases being terminated, etc. Consequently, although the company is making an effort
to collect the material which you requested, we are not in a position to provide a
response as yet. I understano your time constraints, however it simply has not been
possible to produce the materials which you requested. We hope to be able to inform
196
lADE American Schools
May 16, 1995
Page 2
you as to what materials are and are not available by early next week
In light of the general difficulty in locating corporate documents, it would be most
helpful if you could provide me, by fax, with a copy of the original subpoena pursuant
to which these COTC documents have been requested.
We have also discussed the issuance and service of subpoenas for certain
corporate officers to be returnable at the upcoming hearing which you indicated might
be held on June 13 I am willing to accept service of such subpoena on behalf of
Bernardo Stofenmacher, but I am not authorized to accept service on behalf of Sergio
Stofenmacher. Of course, you understand that the acceptance of service of such any
such subpoena does not .ri any way waive any arguments which may lie in support of a
motion to quash, apart, o' course, from service issues
Thank you very much for your co-operation in this matter.
yery truly yours,
Mary Gibbons
cc: Phillip A. Trevino
Gonzolo Freixes
197
Senate Pwmanent SubcommittM
on Invetigatkms
MARK KARALLA, MO
38
e—mwO GrnieOLOO* AN6 l>«»t«TllJTV e«lU«IT M
I MTO MMBIMX IL. sum }Oft
TMZANik CALIFOMNU 0 1 3M
July 11, 199S
Re: Bernardo Stofenmacher
DOB: 9-24-66
To Whom It May Concern;
This letter is to inform you as tt> the condition o£
Bernardo Stofenmacher' s spouse and his inability to
travel at this time.
Mrs. Stofenmacher is currentley under my care for her
pregnancy. She has what is known as a high risk preg-
nancy due to severe edema and possible macrcsoraia. Due
to this condition she— may have to undergo a C-Section.
.As you can sec it is imperative that Bernardo stay with-
in close range to both his spouse and the hospital in
case a complication arises. I therefor feel that at this
point it is a medical necessity that he cancell any and
all plans for travel.
If you have any further questions or require additional
information, please feel free to call my office and my
staff and 1 shall assist you as needed.
Thank you for your time.
Sincerely,
Mark Karalla, M.D.
oincerciy ,
MK/abg
tc:
\J
(J
-■V!
198
MARK KARALLA, M.D.
Obstetrics, Gynecology atnd Infertility
18370 Burbank Blvd. . Suite 209
Tarzana. CA 91356
Phone (8181 881-5661
Fax (ai8) 881-6132
PACflTMSITj; COVER SHEET:
DATE. n-]\-9_^
FROM:
NUMBER OF PAGES :__2=lj (INCLUDING COVER SHEET)
MESSAGE : \-^^ ^ —
■«•■«• IMPORTANT-^"^^ This message is intended or.ly for the
use of the individual to which it is addressed and may contain
information that is privileged, confidential and exempt from
disclosure under applicable law. If the reader of this message
is not intended recipient or the agent or employee responsible
for delivering the message to the intended recipe int. you are
hereby notified that dissemination, distribution or copying of
this communication in errer. please notify us immediately by
telephone and return the original message to us at the above
address VIA U.f,. POSTAL SERVICE
Than): you ,
Dr. Mark Karalla
199
UNITED STATES DEPARTMENT OF EDUCAfWIW^ ^
OFFICE OF POSTSECONDARY EDUCATION
Senate Pemanent Subcommittee
on Investigations
39
THE ASSISTANT SECRETARY
Senator Sam Nunn
Ranking Minority Member
Permanent Subcommittee
on Investigations
193 Russell Senate Office Building
Washington, DC 20510-6250
Dear Senator Nunn:
Enclosed are the corrections to the record for the July 12, 1995,
hearing on "Abuses in Federal Student Grant Programs". _These minor
changes in the transcript are also accompanied by other material to
be included in the printed record.
Thank you for the opportunity to make these changes. Should you
have any additional questions pertaining to the enclosed material,
please have a member of your staff contact me at (202) 708-5547.
Sincerely,
David A. Longanecker
400 UAKYLAND AVB.. S.W. WASHINCTON. DC. 30302-SlOO
Our minion Is tot
200
Question: The Subcommittee staff testified that the Department reversed its policy of
conducting unannounced program reviews in March 1995, just nine months after the
policy took effect. Why was this policy reversed? How many imannounced program
reviews did you conduct in 1994? How many, if any, have you conducted in 1995? What
circumstances must arise before you conduct an unannounced visit? Who has the
authority to approve an unannounced review?
Answer: The Department stopped doing all of its institutional reviews on an unannounced
basis for two reasons. First, we found that unannounced and announced reviews were equally
effective in almost all cases. Second, announced reviews are more efficient. They give
schools the time to prepare for the review and ensure that key personnel are available when
our reviewers arrive. It costs us a great deal of staff time when we arrive at the institution and
the people we need to speak with are unavailable because they did not know we were
conducting a review.
The Department, however, has not abandoned the policy of conducting unaimounced reviews.
When circumstances arise that indicate the possibility that the instimtion is engaged in fraud or
abuse, the Regional Director or the Department's Instimtional Review Branch Chief will rely
on his or her professional judgement to decide whether to conduct an unannounced review.
These circumstances may include, but are not limited to, the following: complaints from law
enforcement agencies, students, parents, and/or the Office of the General Counsel; negative
reports from state agencies or accrediting agencies; information from former or current
employees of the institution; or any other information which may indicate possible fraud or
In 1994, the Department conducted 135 unannounced reviews. In 1995, the Department has
conducted 76 unannounced reviews (year-to-date).
201
Question: Why did the Department's Office of the General Counsel unilaterally agree to
a settlement in June 1994, whereby lADE would be taken ofT the reimbursement system
of funding for the student flnancial assistance (SFA) programs and restored to the
advance system of funding, as the Subcommittee sta^ testified?
Answer: The Office of the General Counsel (OGC) did not unilaterally agree to this
settlement. OGC was obligated to focus on the litigative risk of keeping lADE on
reimbursement when lADE's attorney indicated that the school would seek a preluninary
injunction compelling the Secretary of Education to remove it from reimbursement if the
Department did not do so voluntarily. OGC's obUgation in this regard derived not only from
the need for the Department to act lawfully and avoid unnecessary litigation, but from the need
to provide the Office of Postsecondary Education (OPE) with a reasonable assessment of the
litigative risk. Accordingly, upon being advised of the possibility of suit, the cognizant OGC
attorney proceeded to bring to the attention of cognizant OPE personnel the threatened suit,
OGC's assessment of the likely result, and the content of LADE's proffered settlement offer.
As to the likely outcome of the suit, OGC advised that the Department would likely lose
because the basis for thejchool's having been placed on reimbursement in May 1994 was the
school's improper activities over a period that had ended three years earlier, and because there
was no evidence that these improper activities had occurred more recently. Richard Nelson, of
OPE's Region X, responded by memorandum that his only concern was that it might prove
necessary to place lADE back on reimbursement shortly based on information not yet
available. Ronald Lipton, Director of the Compliance and Enforcement Division, whose
offices had responsibility for placing schools on reimbursement funding, or taking them off,
agreed with OGC's assessment that LADE's offer of a letter of credit in exchange for removing
the school from reimbursement funding was a good outcome for the Department, and he
proceeded to take the school off reimbiu^ment. Thus, to say that OGC "ninilaterally" accepted
the settlement offer is wholly inaccurate; rather, OPE, after consultation with OGC, accepted
the offer.
Question: Can you describe the differences between the Pell Grant Program and the
Direct Student Loan Program with regard to the application process and the
disbursement of funds? In addition, what measures have you taken that will get the
student, the beneficiary, more involved in the disbursement process?
Answer: A student applies for a Pell Grant and a Direct Loan through the same application
process. To determine a student's eligibility, information on the application is electronically
matched with information of other agencies, including the Immigration and Naturalization
Service, the Social Security Administration, and the Selective Service. Furthermore, each
applicant's name and Social Security number is checked against the Department's National
Student Loan Data System (NSLDS) to determine whether the student is in default on a student
loan, or has received an overpayment on a grant. Failure to meet these data base matches
results in either a rejected apjilication requiring corrected information or further
documentation.
In addition to these central data base matches, students need to sign several certifications,
including a statement of registration status, a statement of educational purpose, and a
certification on refunds and default. When the application is processed, the smdent receives a
Student Aid Report (SAR) and the school receives an Institutional Student Information Report
aSIR).
The process by which a student receives a Pell Grant is substantially different from die process
by which a student receives a Direct Loan. A school may disburse a Pell Grant based on the
timely receipt of a correct SAR or ISIR. A school only disburses a Direct Loan based on the
timely receipt of a correct SAR or ISIR, and the timely receipt of a valid promissory note. In
addition, first time Direct Loan recipients must receive an entrance loan interview before the
funds are disbursed.
There are other significant differences between the disbursement of Pell Grants and Direct
Loans. Unless a school is on the reimbursement system, all schools are able to draw down
appropriate Pell Grant fiinds through the Depentment of Education's Payment Management
System upon the timely receipt of a correct SAR or ISIR. Schools which are placed on the
reimbursement system for Pell Grants do not have additional requirements for smdent
notification, but they are required to provide student-level documentation to the Department
before they can receive Pell Grant funds. The reimbursement system of payment is used to
protect the federal fiscal interest as a result of program review or audit fmdings, or other
concerns regarding the fmancial or administrative capability of the school.
Under Direct Loans, schools participate as either originators or alternate originators depending
upon selection criteria. These selection criteria include a school's prior experience in
administering Title IV funds. Originators may disburse funds to students based on the receipt
of a promissory note, whereas alternate originators must submit the loan origination records
and promissory notes to the Department of Education's servicer for approval before funds are
203
Finally, under the Direct Loan Program, the student, the beneficiary of the program, is always
in the loop in terms of direct acknowledgment to the Department of Education. In the case of
both Direct Loan originating and alternate originating schools, the student receives a letter
from the Department of Education's servicer ten days after the loan is booked. A loan is
booked when the servicer receives the loan origination record, signed promissory note, and
disbursement recopd from the school. The letter confirms the amoimt and date of the direct
loan disbursement and details the borrower's rights and responsibilities. The student receives a
letter after each direct loan disbursement. In addition, each June, the borrower receives an
annual statement from the servicer listing the aggregate loan amounts.
In an effort to strengthen the involvement of students to enhance the integrity of the Pell Grant
Program, Deputy Secretary Kunin has convened a Department-wide team to streamline and
reform the entire Title IV dehvery system. This team is expected to propose major changes in
both the rules and the operations of the delivery system, including any legislative proposals
that may be required. Carefiil consideration will be given to the practicality and cost of
reforms, as well as to their effect on both program integrity and burden reduction. This team
expects to complete their work by early 1996.
204
Question: The Subcommittee staff testified that the lADE case is symptomatic of deeper
problems within the Department, speciHcally that, according to members of your own
staff. Senior Management is not committed to strong gatekeeping and is able to be
swayed by political pressure. How do you respond to these allegations?
Answer: Since Secretary Riley, Deputy Secretary Kunin, and I came to the Department, we
have improved the way in which we do business. This is demonstrated by the decreasing
number of institutions now being accepted for eligibility into the Title FV student finsocial
assistance programs and the increasing niunber of institutions being denied eUgibility. LADE
could not happen today using the preventive tools we have put in place, such as the 85-15 rule,
annual financial audits and other changes enacted as a result of the 1992 amendments to the
Higher Education Act. Without a doubt, the Department is committed to the task of tough,
but fair, gatekeeping and oversight responsibilities; indeed, gatekeeping is currently
designated as one of the Department's highest strategic planning priorities.
I also remain committed to our new approach to gatekeeping and institutional oversight under
the management philosophy that Secretary Riley, Deputy Secretary Kimin, and I are pursuing.
We believe that the Department needs to operate more in alignment with modem quality
management principles, which includes investing greater responsibility in better trained and
more highly competent employees. As in every organization, a new alignment of priorities
and changes requires (he Senior Managers of that entity to make some tough decisions that
may not be liked by all.
Finally, I feel it is important to mention that had the subcommittee staff discussed the specific
allegations concerning personnel matters in the same level of detail they afforded my stad^, I
would have been able to correct a number of errors and misrepresentations that now appear in
the record. In the end, we might have been able to avoid the unnecessary airing of these
issues, as I do not believe personnel matters should be discussed in such a public forum.
205
Senate Penrunent Subcommittee
00 iflvestigations
ducatKIR"" " ^^-
OFFICE OP INSPECTOR GENERAL
UNITED STATES DEPARTMENT OF EDUCATlSfi^"^ *'
THE mSPECTOR GENERAL
Ssptember 14, 1995
Mr. Dan Gelber
Chief Counsel to the Minority
Pennanent Subcommittee on Investigation
United States Senate
Committee on Govenmiental Affairs
Washington, DC 20510
Dear Mr. Gelber:
Enclosed, in response to your recent request, are replies to questions raised by the
Permanent Subcommittee on Investigations subsequent to the Subcommittee's July 12,
1995 hearings regarding the Federal Pell Grant Program. We appreciate the opportunity
to provide our views regarding topics covered by Aese questions, and would be pleased
to provide further information or assistance to your regarding these or other issues under
consideration by the Subcommittee.
We hope this information is helpful.
Sincerely,
400 MARYLAND AVE.. SW. WASHINGTON. O.C. 20202-lSlO
206
1. During your testimony on July 12, you stated that "the statutory purpose of
preparing students for gainful employment in a recognized occupation could
be better accomplished and limited Federal vocational training funds more
effectively used if the current funding system were fundamentally changed."
What fundamental changes would you recommend? Do you believe that the
Pell Grant program is the proper vehicle for funding vocational training?
What is your reaction to Dr. Longanecker's approach as outlined during his
testimony?
Work that we performed in 1993 concerning the usefulness of Title IV vocational training
resulted in the recommendation that the funding approach for such training be modified
to take into account labor market needs and the performance of schools in graduating and
placing students. Because school performance and labor market needs are not currently
considere4 schools can and often do promise prospective students high-paying jobs while
providing low-quality training for jobs that do not exist.
Some legislative changes have been made recently to address the lack of performance
measures in Title IV programs, but these are not working. The 1992 reauthorization of
the Higher Education Act required that accrediting agencies and State Postsecondary-
Review Entities (SPRE's) consider graduation and placement rates in their evaluation of
Title rV-funded vocational training programs. Our review of 5 accrediting agencies,
which accredit schools providing vocational training, found the agencies were not holding
schools accountable for meeting performance measures. Further, the amendments required
that schools offering a program of less than 600 hours graduate at least 70 percent and
place at least 70 percent of their students in order to be eligible for Title IV participation.
Unfortunately, the SPRE program has gone unfunded, and the Department has not
enforced the new requirements on accrediting agencies.
The Department is currently exploring several ideas that would institute performance
measures into Title IV funding for vocational training. One such idea is to seek
legislative change making the 70/70 rule applicable to all vocational training funded under
Title rv. This change, if implemented, would ensure that vocational training funded under
Title rv achieved the purposes for which funding was intended.
A second change we have suggested is that the Department consider requiring schools, as
a condition of eligibility for Title IV participation, to submit a labor market analysis
showing that jobs are available in the field for which the school provides training. Such
a change would provide at least some assurance that jobs will be available for students
completing Title IV-funded programs.
Regardless of what fiinding vehicle is used to provide funds to prepare students for gainful
employment, without the fundamental changes discussed above, the taxpayers' investment
will remain at risk.
207
We are currently involved in discussions with the Department to fully develop the
gatekeeping concepts presented by Dr. Longanecker during the hearings. While we
support the ideas presented regarding differentiating among schools based on their
performance, we are concerned that "performance", as described by Dr. Longanecker,
includes only the administrative and fmancial aspects of the schools' operations. We
believe that the Department also has a responsibility to ensure the quality of education
provided by participating schools and that any redesign of the gatekeeping processes must
address this aspect of a school's performance. We are hopeful that our concerns in this
area can be addressed as our work with the Department continues.
2. What is your impression as Inspector General as to the extent to which
political pressure is being exerted on oversight matters? Is political pressure
compromising program integrity?
The extent to which political pressure is being exerted on the administration of ED
programs is not easily assessed. Clearly, it is the role of members of Congress to
represent the interests of their constituents before Federal departments, and this role is and
should be frequently exercised. However, when representation extends to the point where
a member of Congress suggests that federal program officials vary from the letter or intent
of law or regulation to provide special treatment for a grantee or other program
participant, such representation becomes inappropriate political pressure.
We have investigated and reported on only one situation where we determined that
Department officials were influenced by such political pressure. In a case investigated in
1994, a report of which was provided previously to the Subcommittee, we concluded that
a college received substantial consideration in the regulatory process as a result of a
Senator's intervention on its behalf, which compromised the Department's gatekeeping
process. Further, we concluded that the special treatment afforded the college set a
dangerous precedent which undermined the Department's stated commitment to strengthen
the gatekeeping practices in the SFA programs.
This second conclusion points to the primary danger that can result from inappropriate
political pressure. While undue influence might be exercised in only a single case, special
treatment by the Department inevitably will be cited by other program participants seeking
relief from program regulations.
While pressure exerted by a member or members of Congress might be viewed as
inappropriate, it is ultimately the federal program official who must be held accountable
for properly enforcing program laws and regulations. While we have no evidence that
political pressure is comprising program integrity to a major extent, the danger of such
occurring is always present. The attention continuously given this issue by the Senate
Permanent Subcommittee on Investigations serves as a strong reminder to ED officials of
their responsibility in this area.
In your testimony, you stated that the Department has instituted a corrective
action plan in response to your 1993 audit on the effectiveness of. the
institutional review branches. Has this action plan been effective? Are there
qualitative measures which show that schools are being monitored more
effectively or that problem schools are more readily identified?
The Department's corrective action plan designed to improve the institutional review
process is now being implemented. While it is too soon to definitively conclude that it
has been effective, we have seen improvements and we believe the Department is on the
right track. The corrective action plan was aggressive and called for a major redesign of
the entire process addressing key fiimctions such as, staffing, training, selection of schools,
scope of reviews, statistical sampling, reporting and resolution standards. We have assisted
the Department in providing training to the reviewers, designing selection criteria and
sampling methodologies. It will probably be another year or two before we see the results
of this major effort.
Regarding your second concern, we are not aware of any qualitative measures developed
by the Department to show that problem schools are being monitored more effectively or
identified. The Department does have quantitative measures to show how their oversight
and monitoring of schools has improved. However, many of these quantitative statistics
are not truly reflective of the Department's efforts. For example, if a school closed
because it went bankrupt, the Department includes this in their statistics to support the
effectiveness of their oversight in eliminating a problem school, even though the
Department may have had nothing to do with the elimination of the school fi-om the
Student Financial Assistance (SFA) programs.
In addition to the example provided above, in our opinion, many of the quantitative
statistics that the Department provided in support of its testimony presented before the
Subcommittee are questionable, because the Department does not maintain adequate
supporting documentation. Also, we agree that qualitative measures are needed to
accurately assess the Department's progress in improving its oversight and monitoring of
problem schools.
209
4. During the Subcommittee's 1990 hearings, the Culinary School of Washington
was the subject of a staff study. The owner of the Culinary School, Dr.
Barkev Kibarian was subsequently the focus of a criminal investigation by
your office. What were the results of that investigation? Please provide a
copy of any related report.
In the fall of 1990, our office opened an investigation relating to the Culinary School of
Washington. The investigation was predicated upon findings contained in an OIG
inspection report which was provided to the appropriate Department of Education (ED)
program officials in May 1990. Our investigation focused on information which indicated
that in late 1989, the school submitted a number of Guaranteed Student Loan applications
for students bearing the code number for the school's eligible location when those students
were actually receiving training at two ineligible locations, one in Richmond, VA and the
other in Washington, D.C.
In March 1991, the results of our investigation were presented to the United States
Attorney's Office, Alexandria, VA. That Office declined criminal prosecution of the
school's owners, Barkev and Mary Ann Kibarian, for obtaining student loans for students
attending the ineligible Richmond, VA campus. Subsequently, in July 1993, our Office
referred the results of our investigation to ED's Office of the General Counsel (OGC),
recommending administrative action for damages under the Program Fraud Civil Remedies
Act (PFCRA). As of yet, the OGC has not reached a final decision on our recommended
action under the PFCRA. Our investigation remains open, pending a final decision fi-om
OGC.
As soon as the OGC declines this case for administrative action under the PFCRA is
completed, we will be happy to provide the Subcommittee with a copy of our investigative
report.
5. In 1993, the Subcommittee Staff referred allegations of potential wrongdoing
at Savannah School of Art and Design to your Atlanta Regional office. That
office subsequently conducted an audit and investigation of the allegations.
Please provide copies of these reports or a report of the status of any ongoing
inquiries into the operations of the Savannah School of Art and Design.
In response to a referral fi-om the Subcommittee's staff, OIG investigators interviewed a
complainant who alleged that officials at Savannah School of Art and Design were
engaging in improper and/or abusive practices relating to the school's general
administration of Federal SFA fiinds and specific use of operating funds which, in his
opinion, resulted in financial instability for the school. Subsequently, the complainant
provided the OIG with a package of documents, including copies of some of the school's
financial records, which allegedly supported his allegations.
210
OIG investigators spoke with ED program staff about the school's most recent financial
statements which showed a purported increase in liabilities. Those concerns, the school's
two most recent SFA audit reports, and the complainant's documents were provided to
OIG audit staff with an expertise in the areas of fmancial statements and accounting
standards. The auditors determined that the liabilities were secured by real estate
investments and that there was no evidence substantiating the alleged improprieties.
OIG investigators also contacted ED's regional program staff The investigators were
informed that the school had undergone two reviews, the most recent of which occurred
in February, 1994, and that no substantial findings resulted. No further investigation
occurred at that time, given the results of preliminary work which indicated no fi-audulent
school activity.
In April, 1995, the OIG received another referral fi-om the Subcommittee's staff relating
to the school. OIG investigators interviewed the complainant and a former student, who
alleged that the school abused its non-profit status, misrepresented instructor qualifications
to prospective students, and paid bonuses to admissions department employees for each
student who completed a quarter of study. The complainant already had contacted the
Internal Revenue Service (IRS) about the non-profit status and he indicated that the IRS
did not appear to be interested in pursuing that aspect of the allegations. OIG
investigators provided the remaining allegations, which were regulatory in nature, to ED's
regional program staff. Subsequently, the program staff informed the OIG that after
review of the issues and in light of the recent review they had conducted at the school,
they found no basis for further action.
Given the level of scrutiny that the allegations have received by numerous individuals over
a two year period, the workload of major cases involving clear-cut fi-aud, and the lack of
staff resources, the OIG plans no further investigative activity into these same allegations.
211
EXWBIT* 11,. —
UNITED STATES DEPARTMENT OF EDUCATION
OFFICB OP POSTSECONDARY EDUCATION
THE ASSISTANT SECRETARY
JAN , 7
Mr. DanGelber
Chief Counsel to the Minority
Permanent Subcommittee
on Investigations
Committee on Governmental Affairs
United States Senate
Washington, DC 20510-6250
Dear Mr. Gelber:
This is a response to your follow-up questions fiom the hearing. In my testimony at the hearing,
I mentioned that the Department remains interested in pursuing legislative changes that will
significantly enhance our oversight capability. As soon as these proposals have cleared internal
Administration review, I will share them with you. In addition, I have enclosed a draft copy of
the Department's new proposal for improved oversight in Federal student aid programs. The
paper incorporates many of the ideas I proposed at die hearing and is being used as a starting
point for discussions with the higher education community.
I hope that this is helpful to you. If we can be of further assistance, please let us know
Question: During the hearing, you outlined a system for differentiating between
short term proprietary vocational schoob and non-profit degree-granting
institutions. Please, if you are able, provide some of the specifics as to how this new
regulatory approach of yours would work? In what ways will you differentiate
between for-profit and non-profit institutions and between degree-granting and
non-degree granting institutions? You said that your new approach will "recognize
high performance" and reward it with reduced regulation." In what ways will you
measure performance? What manner will you reduce regulation?
Answer: Under the Department's proposal for improved oversight in Federal student aid,
we would continue to increase our monitoring of institutions that pose significant risks to
federal funds while providing regulatory relief to institutions that have consistently
demonstrated a very high level of competence in administering Title FV programs.
The Department will engage in regulatory relief on two levels. First, the Department will
continue to reinvent its regulations to reduce administrative burden on all institutions
where overly restrictive reqxiirements do not improve accountability or protect the federal
fiscal interest For example, the Department streamlined the recertification i^lication
and revised the FAFSA form to include all statutorily-required studenit certifications that
were previously on separate forms.
Second, institutions that have consistently demonstrated outstanding administration of
Title rV programs and strong financial responsibility would be eligible for additional
regulatory relief. Possible criteria for determining that an institution has demonstrated
outstanding administration of Title FV programs could include: an unqualified opinion on
financial statements; no material findings on compliance audits for the prior five years;
demonstrably sound internal controls; low default rates; and a history of successfiil
participation in Title IV programs. Because different accounting standards are applicable
to different sectors, the Department would also develop different financial responsibility
standards for each sector. Institutions that meet these criteria would be eligible for such
regxilatory relief as less fi«quent recertification, less fi^uent submission of compliance
audits, and exemption fi-om certain regulatory requirements such as multiple and delayed
disbursement, verification, and entrance and exit counseling.
Because increased regulatory relief would reduce the Departmental resources necessary to
monitor institutions posing little risk to federal fimds, the Department could more fiilly
focus its resources on institutions that pose greater risk. At-risk institutions might be
defined as institutions subjected to a Limitation, Suspension, or Termination action in the
past several years; on provisional certification (including all new institutions); on
reimbursement; or appealing high default rates. At-risk institutions would be subject to
the fiill set of Department regulations and increased oversight and would receive
technical assistance fiY>m the Department Examples of increased regulation and
oversight for at-risk institutions that the Department could implement through changes in
administrative practices include:
213
• A higher probability of program reviews;
• At-risk institutions with a history of deficiencies would be subject to
tennination actions by the Department unless they improve their
performance in the administration of Title IV programs to adequate levels
within specific time fimnes;
• At-risk institutions that have had two or three m^or program review
findings, such as failure to adhere to ^ refimd policy or failure to follow
ability-to-benefit rules would be terminated fiom participation in all Title
rV programs by the Department;
• New institutions that did not demonstrate good performance would remain
on provisional certification for five years radier than for three years as is
currently required.
Examples of changes that would require legislation include:
• Requiring a personal financial guarantee against liabilities fit>m the owner
of any proprietary institution placed on provisional certification and
holding individiuds with financial authcnity and responsibility at
proprietary institutions personally liable for an institution's unpaid refunds;
• Holding institutions that unsuccessfiilly appeal high cohort default rates
liable for the default costs and subsidies that are paid by the Department
on loans to that school during the ^jpeal process. The Department could
also require a school that chooses to receive loans during the £q)peal
process to post surety in an amount sufBcient to cover these costs;
• Extending the current requirement Ihst short-term vocational programs
graduate and place 70 percent of their students to all nondegree vocational
programs; and
• Permitting the Department to establish a new expiration date for a
Program Participation Agreement for at-risk institutions and thus require a
full application for recertification and enable the Department to make
decisions based on current information.
The improved oversight system would also ensure that institutions provide better
information about educational programs for students to use in making informed decisions
about MvhcK to enroll. This information will help ensure that market forces work better to
eliminate inadequate institutions and programs fit>m participation in Title IV programs
and help students make better decisions.
214
The Administration has proposed legislation that would require institutions that offer
nondegree programs to report information about these programs and information on the
outcomes of previous students to one-stop career centers that would provide this
information to prospective students. This information could include completion rates,
placement rates, licensure exam pass rates, or the percentage of graduates that meet
certain skill standards. Although the specific provisions includwl in the Administration
bill were not passed, the Department will continue to develop and support legislation,
inclutUng provisions in the two versions of the job training bill now being discussed by
the C?o&gress and in the next reauthorization of the Higher Education Act, to improve
information on the outcomes of both degree and nondegree programs available to
students in order to help them make decisions on where to enroll.
215
Question: You have stated that your new approach will differentiate between for-
profit and non-profit institutions. The Subcommittee's hearings in 1993 showed,
and recent information indicates, however, non-profit institutions can abo be
abusive. Moreover, it would abo seem very simple for a school to change its status
from for-profit to non-profit and to simpty plough through all of its profits into
salary and expenses. How will your new approach deal with these possibilities?
Answer: The Department recognizes that in some states, institutions can easily switch
from profit status to non-profit status, or from a non-degree granting institution to a
degree-granting institution. We want to ensure that schools do not evade certain
regxilatory requirements simply by changing their designation. For this reason, we will
subject schools that do change fix)m profit to non-profit or fiom a non-degree granting
institution to a degree-granting institution to the same requirements of their previous
designation for a certain period of time, periu^ as long as five years. We believe that
this would be an effective way to dissuade institutions fix>m changing their designation to
avoid regulatory requirements. We may need your help, however. Last month, the
Department lost a case in U.S. District Court in Kansas that would have bound a for-
profit institution to comply with the 85-15 authority after it changed to non-profit status.
The Department is considering whether to appeal that verdict If it proves that such
provisions will not hold iq) in regulation, we will seek your help and siq)port in obtaining
statutory authority.
216
Question: In his testimony, the Inspector General stated that implementation of the
plan to recertify ail institutions by 1997, as required by the 1992 Higher Education
Act Amendments, did not begin until 1995, and that this will make it difficult for the
Department to meet the statutorily imposed deadline. Why did it take the
Department so long to begin implementation? Given this late start, will yon be able
to meet the 1997 deadline?
Answifir The Department decided to delay implementing the recertification process until
our new data system came on-line. The Postsecondary Education Participants System
came on-line on March 1, 199S and includes space for the additional data that is required
by the 1992 Amendments to the Higher Education Act Despite this delayed start, we
plan on meeting the 1997 deadline. The next group of recertification notices will go out
in January; our work plan projects completion of the project by the 1997 deadline, and
we are on-target to accomplishing this plan.
217
4. Question: In his testimony, the Inspector General noted, despite the finct that the
1992 Amendments to the Higher Edacation Act authorized the Secretary to specify
the passing score on independently administered tests approved by the Secretary,
the Department has yet to publish final regulations implementing this provision.
Had such specific passing scores been promulgated, much of lADE's ability to
manipulate the Ability-to-Benefit testing process may have been curtailed. Why has
it taken the Department so long to implement thu provision? When can Congress
expect final regulations?
Answer: On December 1, 1995, the Department issued final regulations on the Ability-
to-Benefit provisions. Since the statute was first enacted, the Department has approved
independently administered tests and set passing scores through notices in the Federal
Register, despite not issuing final regulations. Furthermore, the Ability-to-Benefit statute
has changed twice, with the most recent change requiring negotiated rulemaking. In this
process, we took time to carefiilly consider all of the concerns raised in order to develop
fair and equitable final regulations. These final regulations strengthen the test approval
process and set the passing score at a higher level to better assess the qualifications of
those students ^o are subject to this provisioa
92-498 96-8
218
Question: The Inspector General has found that when Peil Grants are used instead
of Adult Education programs to fund training in English as a Second Language
(ESL), the education is provided by proprietary schoob that charge more for a
shorter course of study. lADE appears to have taken in a large amount of Pell
Grant funds for purported training in ESL. The Inspector General has
recommended that the Department ask Congress to eliminate ESL courses from
eligibility under the Pell Grant program. What is your position on this
recommendation?
Answer: The Department has engaged in an ongoing dialogue about how to serve ESL
students most eflFectively and has decided not to make any changes to the Federal Pell
Grant Program in this area at this time. An August, 1994 audit report by the
Department's San Francisco Regional OfiBce of the Inspector Genera] recommended that
the Federal Government stop providing Pell Grants for ESL instruction and instead rely
on Adult Education programs for these services. The Department questions the validity
of this study due to its reliance on an extremely small number of institutions and adult
education programs, and due to its sq)parent lack of understanding and ^preciation of the
substantial differences in the purposes of adult education funding and student assistance
funding. The Department will consider the issue of A^ether Pell Grants are the best way
to provide support for ESL students in the next reauthorization of the Higher Education
Act
219
Question: The Inspector General noted a concern about a loophole in the provision
prohibiting Pell Grants to prisoners which would allow local and county jail
prisoners to continue to receive Pell Grants. How big a problem is this — how many
local prisoners continue to receive Pell Grants and how many schoob continue to
enroll such prisoners? How many waivers have been granted in recent years? Does
the Department see this prisoner loophole as a problem? If so, what does the
Department intend to do to address it?
Answer: The Violent Crime Control and Law Enforcement Act of 1994 amended the
Higher Education Act of 1965 by providing that students incarcerated in Federal or State
penal institutions are no longer eligible to receive Federal Pell Grants for periods of
enrollment that began on or after September 13, 1994. Due to the manner in which the
1994 amendment was drafted, students incarcerated in local penal institutions, stich as
those operated by city or county governments, remain eligible to receive Federal Pell
Grants as long as they meet all other eligibility requirements.
The Department opposed the exclusion of any eligible incarcerated students fix>m the
Federal Pell Grant Program due to the positive impact of postsecondaiy education and
training on the rehabilitation of prisoners. However, the Department has complied with
and implemented the amendment as enacted.
The 1993-94 award year was the first year in which the Department collected data
concerning whether a Federal Pell Grant recipient was an incarcerated student In that
year, almost 43,000, or 1.1 percent of the more than 3.9 million Pell Grant recipients,
were incarcerated students. In 1994-95, less than 25,000, or 0.6 percent of the Pell
recipients, were incarcerated students. And through November 1995, only 777 of more
than two million Pell Grant recipients, during this current award year, were incarcerated
As the data for 1 995 indicate, a very small number of incarcerated students continue to
receive Pell Grants, wiiich indicates that this does not present a substantial policy issue.
220
Question: The Inspector General has stated that he u donbtfiil that there will be
any meaningful reform in the accreditation process despite the statutory mandate
for accrediting standards because the accrediting agencies are reluctant to use
performance data to assess the effectiveness of the job training programs they
accredit He recommends Congress consider legislating appropriate performance
standards. How do you respond to the Inspector General's comments in this area?
Answer: The Inspector General and I disagree on the progress made by accrediting
agencies with regard to their evaluation of educational programs through the creation and
development of specific standards. We require accrediting agencies to have standards to
assess student achievement and outcomes and we are holding them accountable for these
standards. We have completed a preliminary analysis of the standards used by the
agencies that accredit proprietary institutions and have found that most have moved, or
are moving, toward developing quantitative standards for educational outcomes, such as
completion and graduation rates, job placement rates, and passing rates on state licensing
exams.
We realize that the accrediting agencies have more work to do in this area and we will
continue to hold them responsible for ensuring that the institutions that participate in the
student financial aid programs are providing quality education and training to their
students. In addition, our National Advisory Committee on Institutional Quality and
Integrity (NACIQI) is reviewing ^plications for agency recognition very carefully and is
ensuring that agencies are meeting diese requirements before they are recognized by the
Secretary.
221
8. Question: Currently, when a school which is terminated from the student loan
program for high defiault rates it u still eligible to participate in the Pell Grant
program. Should these schoob terminated for high default rates remain eligible to
participate in any other Titie IV program?
Answer: An amendment to the House Appropriations bill, introduced and passed on
Augu§t3, would terminate institutions from the Federal Pell Grant Program if they had
already been terminated from the student loan program because of high default rates. The
Department does not oppose this amendment, but is concerned about possible
consequences for institutions with default rates between 25 and 40 percent that have very
few student loan recipients. A high default rate for an institution with a small number of
borrowers could eliminate unfairly Pell Grants for a substantial portion of the student
population. This situation is most likely to occur at community colleges where
borrowing rates are very low but participation in the Pell Grant program is much higher.
To adjust for this situation, institutions with high default rates could continue loan
eligibility, and thus Pell Grant eligibility, if they meet one of the specified mitigating
circumstances. On December 1, 1995, the Department issued final regulations to revise
the definition of mitigating circumstances. Specifically, if the institution's cohort default
rate multiplied by the percentage its enrolled students receiving a student loan resxJts in a
product less than or equal to 0.0375 over a definite time period, the institution would not
be terminated fix>m the student loan program, and would remain eligible for the Pell
Grant program.
222
Discussion Draft
Proposal for Improved Oversight
in Federal Student Aid
U.S. Department of Education
November 1995
223
Discussion draft
11/29/95
The Department of Education is proposing enhancements to its system of monitoring and
oversight of institutions that are participating in Title IV student financial aid programs. Under
this proposal, the Department would continue to increase its oversight of institutions that pose
significant risks to federal funds and of new institutions, because they may experience problems
in administering federal programs. The Department would also provide regulatory relief to
institutions tkathave consistently demonstrated a very high level of performance in
administering Title IV programs. Because increased regulatory relief would reduce the
Departmental resources necessary to monitor institutions posing little risk to federal funds, the
Department could more fiiUy focus its resources on institutions that pose greater risk. This
proposal builds upon regiilatory relief efforts and increased efforts to monitor and oversee at-risk
institutions that are already underway in the Department.
The Department will use this proposal as a starting point for discussions with Congress
and the higher education community on the role of the federal government in managing Title IV
programs and providing better information to students. The Department requests comments and
suggestions on this proposal and other ideas for improving the system of oversight of federal
student aid programs. The Department will work closely with the higher education community
to develop the specifics of the proposal, including administrative and financial performance
criteria to identify institutions eligible for regulatory relief and institutions needing increased
oversight and support.
RygwljttgrY R^lirf;
The Department will engage in regulatory relief on two levels. First, the Department will
continue to reinvent its regulations to reduce administrative and paperwork burden on all
institutions where overly restrictive requirements do not improve accountability or protect the
federal fiscal interest. For example, the Department streamlined the recertification application,
revised the FAFSA form to include all statutorily-required student certifications that were
previously on separate forms, and is developing a less complex refund policy for all institutions.
(Statutory changes will be necessary to simplify the refiind policy to the extent desired.)
Second, under this proposal, institutions that have consistently demonstrated outstanding
administration of Title FV programs and strong financial responsibility would be eligible for
additional regulatory relief Possible criteria for determining that an institution has demonstrated
outstanding administration of Title IV programs could include: an unqualified opinion on
financial statements; no material findings in compliance audits for the prior five years;
demonstrably sound internal controls; low default rates (adjustments would be made for
institutions with a small percentage of students borrowing); a history of successful participation
in Title IV programs; full unqualified certification; and absence of any adverse actions by
accrediting agencies during the institutions' last two full accreditation reviews. The Department
224
Discussion draft
11/29/95
would also develop different financial responsibility standards for different sectors. Because
different accounting standards are applicable to different sectors, financial statements are not
consistent across all sectors. The Department will develop financial indicators which, although
different, nevertheless measure the same aspect of financial health across all three sectors.
Institutions that meet these criteria for strong administrative and financial performance -
would be eligible for such regulatory relief as less frequent recertification, less frequent
submission of compliance audits, and exemption from certain regulatory requirements (such as
multiple and delayed disbursement, verification, and entrance and exit counseling requirements).
A significant percentage of the departmental resources currently used to oversee and monitor the
requirements for strong institutions would be used to focus more resources on at-risk institutions.
Institutions that do not meet all of the criteria for strong Title IV management would still
be able to apply for selective regulatory relief through the Quality Assurance (QA) Program.
Under the QA program, institutions that voluntarily demonstrate that they meet certain criteria
related to their management of Title IV programs would be eligible to request specific regiilatory
relief tied to their administrative performance. For example, institutions voluntarily
documenting low default rates would be eligible to develop their own exit and entrance
counseling requirements. As institutions improve their performance in Title IV programs, they
could become eligible for additional regulatory relief The Department is already starting to
provide this case-by-case regulatory relief under the experimental sites authority.
Several of the proposals would require statutory changes in Title IV of the Higher
Education Act (HEA). Because it is unlikely that legislative changes could be made before the
next reauthorization of the HEA, the Department proposes to expand its use of its experimental
sites authority to provide statutory and regulatory waivers.
Increased Monitoring and Oversight of At-Risk Institutions:
The Department would increase monitoring and oversight for at-risk institutions. At-risk
institutions might be defmed as institutions subjected to a Limitation, Suspension, or
Termination action in the past several years; on provisional certification (including all new
institutions); on reinibursement; or appealing high default rates. At-risk institutions would be
subject to the full set of Department regulations and increased oversight and would receive
increased technical assistance from the Department. Examples of increased regulation and
oversight for at-risk institutions that the Department could implement through changes in
administrative practices include:
• A higher probability of program reviews by the Department;
225
Discussion draft
11/29/95
• At-risk institutions with a history of deficiencies would be subject to termination
actions by the Department unless they improve their performance in the
administration of Title IV programs to adequate levels within specific time
frames;
• ^t-risk institutions that have had two or three major program review findings,
such as failure to implement satisfactory progress standards, failure to adhere to
the refund policy, or failure to follow ability-to-benefit rules, would be terminated
from participation in all Title IV programs by the Department; and
• New institutions that did not demonstrate good performance would remain on
provisional certification for five years rather than for three years as is currently
required.
Examples of changes that would require legislation include:
• Requiring a personal financial guarantee against liabilities from the owner of any
proprietary institution placed on provisional certification and holding individuals
with financial authority and responsibility at proprietary institutions personally
liable for an institution's unpaid refunds;
• Holding institutions that unsuccessfully appeal high cohort default rates liable for
the default costs and subsidies that are paid by the Department on loans to that
school during the appeal process. The Department could also require a school that
chooses to receive loans during the s^peal process to post surety in an amount
sufficient to cover these costs;
• Extending the current requirement that short-term vocational programs graduate
and place 70 percent of their students to all nondegree vocational programs; and
• Permitting the Department to establish a new expiration date for a Program
Participation Agreement for at-risk institutions and thus require a full application
for recertification and enable the Department to make decisions based on current
information.
To help identify institutions needing more oversight, the Department is developing a
system of risk analysis that will enable the IDepartment to better select institutions for
examination of compliance and concentrate resources on institutions with potentially serious
problems. Making this system viable will require improvement of information in the
Department's data bases such as the National Student Loan Data System, the full development of
226
Discussion draft
11/29/95
the Postsecondary Education Participants System, and the development of good tracking
systems. The Department is taking steps to increase data integrity and is committed to providing
the systems required.
To better implement oversight of at-risk institutions, the Department is moving toward a
new approacibof monitoring institutional performance in Tide IV programs. Currendy, the
Department reviews institutional performance through four largely independent processes -
recertification, analysis of financial statements, review of compliance audits, and program
review. While recertification requires some cross analysis of these different areas, the system
does not otherwise facilitate decisions based on the total information the Department may have
concerning an institution. The new system will use case management as the central core process
and will enable decision making based on all information concerning a school which may be
relevant to Title IV compliance, including information supplied by outside entities such as
accrediting agencies.
Student Information:
The improved oversight system would also ensure diat institutions provide better
information about educational pro^grams for students to use in making informed decisions about
where to enroll. This information will help ensure that market forces work better to eliminate
inadequate institutions and programs from participation in Tide IV programs and help students
make better decisions.
Under the Student Right to Know Act, all institutions must make available their
completion and graduation rates in their catalogs or other material readily available to all
prospective students requesting this information. The provision of graduation rates should allow
prospective students to consider the likelihood of completing at a specific institution, the
potentied benefit they would derive from the time and money needed to invest in a program, and
whether diey would be more likely to benefit at anodier sdiooL Final regulations to implement
the Student Right to Know Act will be published December IsL These regulations require
institutions to begin disclosing completion and graduation rates for students v^o enter the
institution after July 1, 1996. Completion and graduation rates will be calculated for full-time,
undergraduate certificate- or degree-seeking students.
In addition to information required under the Student Right to Know Act, die
Administration has proposed legislation that would require institutions that offer nondegree
programs to report information about these programs and information on the outcomes of
previous students to one-stop career centers that would provide this information to prospective
students. This information could include completion rates, placement rates, licens\ire exam pass
rates, or the percentage of graduates that meet certain skill standards. Although the specific
227
Discussion draft
11/29/95
provisions included in the Administration bill were not passed, the two versions of the job
training bill now being discussed by the Congress include related provisions.
• Under the bill passed by the House, states would require institutions that offer
nondegree job training to submit certain performance-based information to the
»*state before the institution could become eligible to receive federal funds for job
training programs. This information would be made available to prospective
students through integrated career centers.
• The job training bill passed by the Senate creates career centers for distribution of
information to prospective students, but does not specify how the career centers
will obtain information from institutions.
The Department will continue to develop and support legislation to improve information
on the outcomes of both degree and nondegree programs available to students attending
institutions participating in the Title IV student aid programs. The Department plans to continue
this focus in specific proposals included in the next reauthorization of the HEA.
iUe„OMU ON rWESTiGJ'lONS
^3 JUL I 6 1995
GEORGIA STATE POSTSEC(5ft^/KY KhVlbW ENTITY
A Unit of the Nonpublic Postseamdery Education Commission
William C. Mingvim, Jr.
M-E-M-O-R-A-N-D-U-M
Ross Miller
DATE; July 12, 1995
Penmanent Subcommittee on Investigations of the Committee on
Governmental Affairs, United State Senate
Ross Miller ^^'^
SPRE Administrator
Administration of Title IV, Higher Education Act with particular reference to
Pell Grants and the State Postsecondary Review Program
Access of an institution and its students to Pell grants generally follows the procedures
your subcommittee described as applicable to the Guaranteed Student Loan Progra.m
in its Report 102-58 dated May 17, 1991. Some revisions and additions were
incorporated in the Higher Education Act amendments of 1992.
In Georgia, Pell grants are enabling many students to have access to postsecondary
education who could not otherwise assemble adequate financial resources, and many
lives have improved through this assistance. Nevertheless, some of the postsecondary
programs are not serving the students well. This office observes several problems.
Sometimes an institution will admit a student who is unlikely to successfully complete the
program and enter the job market. Sometimes an institution offers a weak program.
Sometimes an institution does not provide adequate services (I.e.. placement,
counseling). And, in many cases, economically disadvantaged citizens are left with
overpowering debts because their tuition for job training in low-paying occupations was
inflated to make them eligible for full Pell grants. (Thus, they signed for a
complementary loan for every grant received.)
Also, states vary in licensing requirements. A plan to strengthen state oversight of
institutions administering Title IV funds was described as the State Postsecondary
Review Program. This program has already had some positive effects. It is my belief
that strengthening the role of the states in oversight will lead to a reduction of fraud and
abuse in Pell grants as well as in other Title IV financial aid programs.
2100 East Exchange Place, Suite 203 • Tucker, Georgia 30084-5313
(404) 414-3307 • FAX (404) 414-3309
Senta PwmafiMt SrtcommittM
Patricia
Stevens
COLLEGE
July 8, 1995
The Honorable William V. Roth, Jr.
United States Senate
193 Russell Senate Building
Washington, D.C. 20510
Dear Senator Roth:
As Chairperson of the Commision for Postsecondary Schools
Accreditation of the Accrediting Council for Independent Colleges
and Schools, I have a similar sense of frustration as expressed
in your release of July 6, 1995.
For a number of years, our body has been pursuing an objective
-tool for evaluating the quality of proprietary education which
would assist in eliminating the abuse at issue. Traditionally, the
focus of such evaluation has relied primarily on institutional
default rates. As the Executive Director of an institution with a
history of single digit default rates it would be quite simple to
leave the issue alone; however, my 35 years of industry experience
and my six years as a commissioner make it very clear that an
objective evaluation of education must include a focus on the
fol lowing:
a. Job Placement Rate
b. Retention/Graduation Rate
c. Default Rate
d. Socio-economic Background of Student Population
with appropriate adjustments including urban employment rate and
program length.
Enclosed is a copy of a proposed IQE which would clearly provide a
means for contrasting quality programs with those of inferior
performance and thus provide an appropriate instrument for weeding
out those institutions that fail to perform. I anticipate moving
the adoption of the index with necessary revisions at the August
meeting of our Commssion. The Index has been shared with Marianne
Phelps at DOE and with Congressmen Andrews, D-NJ, Costello, 0-IL,
and Talent, R-MO.
1415 Olive Sireel
Saint Louis, Missouri 63103
Telephone (314) 421-0949
Facsimile (314) 421-0304
230
Letter, Senator Roth, July 8, 1995,
In closing, it is critical that you understand the deep concern
that the majority of us within the proprietary industry have about
the nature of this abuse and of our willingness to assist you and
others in bringing it to an abrupt end.
Enclosure
231
INSTITUTIONAL QUALITY INDEX
Background
For many years, various agencies have sought to evlauate the
quality of proprietary education using the singular measure of
default rates as the basis for determining educational quality.
The Department of Education (DOE) has further challenged the
accreditation process as a qualitative means of evaluating
education both openly (by reducing recognition length to three
years and by requiring agencies to provide technical assistance to
member institutions via Default Management Programs) and
internally as expressed during meetings with Commissioners and
Department representatives.
AGIOS has, over the years, sought to identify objective data that
may indicate when an institution is providing quality education.
Typically, issues such as retention, placement, as well as default
rates, and socio-economic background of students have evolved as
realistic tools for measuring institutional effectiveness.
Most recently. Representative Rob Andrews (D-NJ) has proposed the
"Quality Educational Index Act" (H.R. 4384) to replace the current
measur-e of cohort default rates.
As a result of the above background plus the results of numerous
studies which clearly demonstrate that socio-economic backgrounds
of students, length of progreuns, and urban employment rates affect
institutional outcomes, the cohort default issue is not a
realistic means in itself of evaluating educational quality. It
appears today, that this Council has a unique opportunity to
develop an index which could objectively identify:
a. Institutions providing quality educational programs
b. Institutions needing to strengthen educational delivery
and further:
c. Provide a means of developing incentives to reward quality
institutions
d. Provide insight for the development of technical
assistance and training to strengthen those institutions
of marginal quality
Assumptions
The development of a formula for indexing institutions appears to
focus on the following areas:
a. Job Placement Rate
b. Retention/Graduation Rate
c. Default Rate
d. Pell Eligibility Rate of Students Served
and further:
e. Urban Employment Rate
(1)
232
Formu 1 as
An initial draft of a formula, authored by ACICS Counsel William
Clohan, in conjunction with current COPSA Chair Richard R. Harvey,
fol lows:
Institutional Quality Index (IQI)=
2 (retention rate) + 2 (placement rate) +(100 - default rate)
with the following adjustments:
Retention Rate: the calculation of the Adjusted Retention Rate
(AdRR) is as fol lows:
"For every percentage of the entire student body represented
by an economically disadvantaged student, the actual
retention rate would be adjusted by two-tenths of one
percent. Then, the resultant number would be multiplied
by the factor based on the length (LP) in academic years."
Length of Program Factor
LP <1 1
LP= 1 1 "~
1 <LP</=2 1.2
2 <LP</=3 1.4
3 <LP</=4 1.6
For example, if a two year program had 30* of its students
enrolled with ZEFC (zero expected feutiily contribution) and it had
an actual retention rate of 66X, then the AdRR would be 86.
AdRR= 1.2[AcRR] + .2(ZEFC) = 1.2[66 + .2(30)]= 1.2[72]= 86
Placement Rate: the calculation of the adjusted placement rate
(AdPR) is as fol lows:
"for every one-half of one percent the unemployment rate in
the service area exceeds full employment (the marginal
unemployment rate or MUR) for that area as defined by the
U.S. Department of Labor, the Actual Placement Rate(AcPR)
will be increased by one percent."
For example, if the AcPR is 70* and the unemployment rate exceeds
full employment by 4*, then the AdPR is 78.
AdPR= AcPR + MUR/. 5= 70 + 4/. 5= 70+8 =78
(2)
Default Rate: the calculation of the Adjusted Default Rate_(AdOR)
is as fol lows:
"For every percentage of the entire student body represented
by an economically disadvantaged student, the actual default
rate (AcDR) would be adjusted downward by two-tenths of one
percent .
An economically disadvantaged student is defined as one who
has a zero expected family contribution(ZEFC) . "
For example, if an institution had 30* of its students with zero
EFCs and had an actual default rate of (AcDR) of 30*, the
institution's adjusted default rate (AdDR) would be 24.
AdDR= AcDR - .2(ZEFCR) = 30 - .2(30) = 30 - 6 = 24
Sunmary of Example:'
The IQI would then be calculated as follows:
IQI= 2 X AdRR + 2 X AdPR + AdDR
2(86) + 2(78) + (100-24)= 172 +156 +76= 404
Ratings:
Absolute Ratings:
430 and above= substantially exceeds minimum standards;
exempt from many accreditation criteria and reporting
requirements; probable extended grant of accreditation.
385-429= exceeds minimum standards; exempt from some
accreditation criteria and reporting requirements;
possible extended grant of accreditation.
340-384= meets minimum standards; treated within standard
criteria and grant process.
295-339= below minimum standards; possible deferral or
showcause.
295 and below: substantially below minimum standards;
subject to showcause or suspension.
Relative Ratings:
Instead of the absolute scale above, ACICS may want to use
standard deviation analysis to determine incentives for
positive performance or a need for special review. Since
factors that have a significant impact on the results have
already been provided for, it is now possible to compare
institutions in one grouping instead of segregating the
institutions
(3)
234
ANDREWS FORMULA
The initial proposal of Representative Andrews (D-NJ) (as
described in the November, 1994 issue of the Career Co 1 1 ege Times
is as follows: (if interpreted correctly)
Job Placement Rate(JPR) + Pell Eligibility Rate(PER) + Cohort
Default Rate(CDR) + Qraduation/Licensure Rate(GLR)= Quality
Educational Index(QEI), weighted as follows:
JPR X 37.5* + PER X 25* + CDR x 25* + QLR x 12.5*= QE I
thus an institution with a JPR=90*, PER=50*, CDR=8*, and GLR=85*
would attain a QE I of 79.88.
That is: (90 x .375) + (50 x .25) + (92 x.25) + (85 x .125)=
33.75 + 12.5 + 23 + 10.63= 79.88
It appears that by using ACICS AIR data, a relative scale using
standard deviation analysi-s could be most effective.
Example: ACICS industry average using above formula= 68.20,
institutions -t-12 points substantially exceed minimum standards
and could anticpate incentives similar to absolute scale
previously described.
Institutions -12 points, not meeting minimum standards, subject to
appropriate action(s).
Questions?
1. Are appropriate adjustments built into Andrews formula?
2. Does Graduation/Licensure Rate equate to Retention Rate?
SUMMARY
# Retention rates are affected by socio-economic background
of student population and by length of program.
# Placement rates are affected by unemployment rate in
geographic region served by instiution.
# Default rates are affected by socio-economic background
of student population.
Any formula that drives a consideration or action by ACICS should
account for these factors.
(4)
235
DATABASE
# Only as accurate as information submitted by institutions.
# Formula should include public information to be valid in
eyes of DOE or other agencies.
« Subject to audit prior to giving considerations.
» Formula for internal Council use only or to be revealed to
field?
AUDIT PERIODS/ACTIONS
1. Following review of AIR, letter directed to institution
advising of level of accreditation.
2. 3 year period prior to year of grant expiration, if
willing to audit AIR data and not on financial review,
probable extension of grant without self study/scheduled
visit.
3i^"wo consecutive AIR's placing in lower index could trigger
action.
IMPLEMENTATION
1. Following final review, a motion will be placed before the
Council at the August meeting to phase in IQI in Fall,
1995.
Step 1: Adopt formula, apply to 1995 AIRs
Step 2: Structure index using both absolute and
relative methods of analysis
Step 3: Institutions substantially exceeding criteria
via both methods of analysis will be advised
accordingly and recognized at 1996 Annual
Meeting?
Step 4: Review process in August, 1996 meeting
including review of Team Reports of those
institutions recognized by process and who
have had visits during the cycle.
Step 5: Implement changes as necessary including
communication to institutions with less
than minimal performance.
Note: annual review thereafter is assumed.
2. Assuming evolvement of IQE moves as scheduled, implement
possible extension of grant for institutions with positive
indexes for years 1995, 1996, and 1997. Institutions with
grants expiring 12/31/98 would, thus, become first group
eligible under program.
(5)
236
ScMtt Pemancirt SubcbffltmttM
lAOE AMEr?lCA.Ni SC:-CXDLS c»u,BrT # 46
OOfWORATC OfPICI; UO W. WASHINOTON M.VO.. LOS ANOetXf.XA WOtl
PMOtM: <aiS) 74*-WO0 PAX: 01» 74*-U01
Uncvii Cnomt*, A.Sin)5 CUcf
:>jtauli Moomeniciil S<rn)ou
(Jiiiicd Slulu DopgtmciH ot lohicsUon
UOB - 3; Rocn « 3919
400 Moryluid Ave., S.W.
WniUUaitoo, DC 202(n-S3.13
Ro: Voiuniory WUUdnwttl Aom ITEL Profinmi of lAOE
SciiooU; Sdiooi ID: 026088
Thiti kXmuitAiiMiBuu) »jry<w <ij> a Axirui rtxjuMt by 1AD£ AnienoiA ScbooU (2>ciiw<l iC: ai60)UJ) Uiot we be allowed
in volunorUy vlthdnw pennmenlly (ram all Federal Fmnlly EducaOon Lou Progmns effectlvo tanmadlaldy. Given
that tU* inaomtloa't cumot 1991 Cobon defkuU rate la 44.6 percent and wu Dot reduced by 5 peroeotaie potaui
rram our FY 1990 rate, we are well aware that ibe Department could in the future elect to Isldais aa adminiitnuive
uctioo 10 Mmlt. oitpend or termtnaa (LS&T) our eagftUlty to panlclpus in Title IV aid programa. While we are,
of course, bopeful tbat our official wltiidrawal bom die FFEL progtami will allevlata ibe need for any nicb actico.
lADE, in all caodcr. did not withdraw bom FFELP becaoae of oar PY 1991 cobort default rate. In tact. lADE hai,
m actuality, already dlicoatinued cunilying ^U, F7ELP loooa more tban a year ato well before Ibe FY 1991 rMet
bad been Usoed. In addldoo. we bad. besun a drsmatic reducUoo tn tbe number of kwu cerUAcd weU before wc
.xc^ved our am let of cobort default Uatiatict for FY 1990. WUle lADE reaUaes tbat our voluntary witbdrawal
rrom the FFEL Protranu doet not automadcally preclude tbe Dcparsseat from purmint fumre odminiitinove octlan
rdiutvt! 10 ntber "HUe IV aid prosrams, we believe ifae foUowing lacton clearly tmUeaie diat tucb ocdco would ba
unwEtmiMed. Please conider each uf tfae fdknking factora:
lADE b«l voluattrtly i
ta ALL FBdr Podana
.16. 1992^ Dorini ttaia period In 1992 lADL
wlootarlly went Cram ceinty an average of 40 sudeai loant per montb to tbe foUowini certificatioa laiet:
S/92 • 13 loans, fi/92 • 4 loans, 7/92 « nu loans, 8/92 > 3 bant and 9/92 ■ 4 toana. As previously
Indcaktd, not a tlogie Federal Family Education Loan has been cenifled by lADEilace September, 1992.
Upon asaumlng the position as Corporate Ditectcr of !%iandal Asslsiance for lADE American Schools In
r^ecember of 1991, Ken Wllliami, Jr. became conceitied that a number of £Kton attodiitrf! wufa L\DH'>
Mideot popalauon, coul.-i. despite our best default pres'sntlon tttom, e.e., lADE votancirlly tmpiemeeted
'Appendix D' prior to being requhed to do ic make management of lUident loon defaults extremely
dlfFlcalt, If not tmpoulble. Coasaquently, lADE dodded to begin a dtafflitlc leduetton la tbe number of
l<>an« certified Matting in April of 1992 and ultimately to voluntatily discontinue partldpaiioa In all FFEL
programs. This paiticipatian ended in Si^iemher of 1992. The last loan guannieed (or this tnstUation,
acconfing to of&cial Colifoniia Student Aid Commission (CSAC) records, was oo September 16. 1902. If
It 10 chooses, tbe Depanment may confirm mis fact, and other CSAC data pceaenied In this leaer. widi Ms.
Mlcbele Walter. Program Analyst for CSAC. SbA muy be reached at (916) 323-9841
lADE did not become eligible to participate in Title Iv ai<i pn>grams undi August 14, 19S9 and did not
hegiu certifying suidcni lr«ns until October of (be lams >-sar. .V: nicb, lAUE ad not receive its Qni cohort
defauU i«e data fian the Department until July 6, 1992 when ii receive tbe FY 1990 cohort data. This
Initial detajlt rate notice conflmed the concerns we bnd already idendlted. Keeping b ibM ttuu we be;an
rediiciui: FFHL pattlciputioo on April 21, 1992 aud bad done only four loons is the mootb preceang th;
l^epwuitenl having issued lADlVs first set of cohort duta on July 6, 1992, it is dearly evident dut lADE':
^AX TRANSMITTAL l""^' h_
Mm
-w^
^1^-
.^x
237
lADE aviepiC'\n; schoo
COHPORATB OFPICC: (M W.
PHONE; (21S>
Croneva Coombs; Default Maoaycment-USDE
irELP Withdrawal of lADE Schools (02fiO8g)
October 6, 1993, paje 3
educe smd lul
Programs resulted from iniemal policy «
loan debt nulier than as a fault of any
paiticipaiian in tbe Fedenl Family Education
our desire to avoid saddling students wUb
n the Department of Education to do so.
Ken Williams, Jr., lADE's Corporate Director of Student FnuDcial Assistance is tbe fonner bead of training
for the Callforaia Student Aid Commitslaa's Division of School Services. In that capadiy Mr. Williams
served as the chief training ofTicer for die more dun 800 posuecondary issiitutians participating in tbe Part
Q Loan programs. Mr. WUiiam* Is recognized as a neiiaoal ocpen on student loan defaults and has
repeatedly presented on the topic for such organiratlom as Ihs National Council of Higher Education Loan
Program* (NCKELP), the Western Regiroal .Ajsodaiioo of Student Hnancial Aid Admlnlstraton
(WASFAA) and the CailfOmia Assodadoo of Student Financial Aid Administratan (CASPAA). Mr.
Williams' credentials make It clear that lADE made every conceivable effort to cmb its insdtutional default
nue, even spotting tbe problem befiote It was brought to our attention by the Depanmem for the first time
on July 6, 1992. As such, there Is UUe evidence to suggest the existence
management of the PFHLP or other Title rv aid progrtdm wbich would wanan
As we bad voluntarilv ditcontfawed all peitidpaticn bt September of 1992 and knew we woald not be
certifying addliional loans, we urigimUy saw no need to oHicialiy notify Qw Department to remove the Pan
B Loan Programs bom lADE's list of ellgibte Tlile IV progiams. However, to effort to confinn to the
Department that our wiihdravrai was, and is, botb sinoeie tad pennancm, we have elected to do so ofRdally
ut (bis time.
It the FFEL PiDgiams, lADE will of course, continue to work with Ibe Department,
stale guaranty agencies, ionden, servicen and lecaodary marlMS in assisting in skip tracing and other efforts
designed to protect the integrity of Federal Family Frtnration Loan Progtams. Agabi. while lADE acknowledges
the fact that our witbdrawal Eram FFEL progtamt does not preclude the department from taking future administrative
uction as relates to other Title IV aid programs, I believ« tbe DKian ootliDed above would clearly not waimni such
Ktion. Should you, bovraver, have questions or desire addhiooal docmneataUon, please feel free to contact eltfaer
myself or lADE's Director of Student Fmaodal Aisimnre. Mr. Ken Williams, Jr. Tliank yotr for your considenuion.
Institutional Participation Division, USDE
Califoniia Student Aid I
AGGETS
STATl OF CAUFOflNlA PgTE WILSON.
COUNOL FOR PRIVATE POSTSECONDARY
AND VOCATIONAL EDUCATION
1027 1Mh Swot Four* FtoOf
SacnfTwNa. CA 9S814
EXHIBIT #
CORRECTED COPY
DanGelber
Chief Counsel to the Minority
Permanent Subcommittee
on Investigations
United States Senate
Committee on Governmental Aflairs
Washington, DC 20510-6250
Dear Mr. Gelber __
Thank you for the qjportunity to comment on the closure of lADE American Schoob and the
impact of the closure on federal financial aid programs.
Impact of School ClOMm on the STRF
California maintains a Student Tuition Recovery Fund (STRF) for residents who have su^iered
a loss as a result of the untimely closure of a school or breach of contract, including the failure
to pay a refund.
Since January 1992, $611,842.00 has been paid to students who attended schools participating
in Title IV programs. A list of the forty schoob for which STRF claims were paid is attached.
Summary of the review of lADE American Schools
Attached is a summary of the Audit report for lADE American Schools. Based on Ae lADE
audit, and others, we ofifier the following observations:
1. For ESL programs, the federal requirements for documenting prior knowledge,
training or skills are inadequate.
This was the most common area of noncompliance in our seventeen audits of
schools receiving Pell grants for ESL instruction.
2. Under the current federal financial aid system the only way to determine that
refunds are being calculated correctly is through an audit Schools should be
required to submit refund information electronically to test refund calculations for
accuracy.
I
I
239
3. There is little verificauon that refiinds are actually returned to the lender.
In 1993, California amended the STRP to reimburse students when schools have
failed to pay refunds to lenders. It is common that schools pending closure will
stop paying refunds to lenders.
4. Schools suspected of fraud and abuse should be placed on reimbursement,
pending their resolution of outstanding audit issues.
I hope this responds to your request for information. If I can be of fbitiier assiaance, feel free
to telephone me at (916) 327-2215.
iydfC-U^
Consumer and Student Protection
240
Financial Impact of School Closures on the
Student Tuition Recovery Fund Since 1992
n-May-95
School
ADRIANS BEAUTY COLLEGE
AL TATE BEAUTY COLLEGE
ALAMEDA TECHNICAL COLLEGE
AMERICAN BUSINESS INSTITUTE
AMERITECH-BAKERSFEELD
AMS COLLEGE
ANIONS SCHOOL OF COSMETOLOGY-
BETA TECHNICS. SCHOOL
BROOKLINE TECH
CAREER DEVELOPEMENT INST.
C.AREERCOM
COLUMBL\ SCH BROADCASTING
GOLDEN STATE COLLEGE
GRACE BEAUTY SCHOOL
GROVE SCHOOL OF MUSIC
HISER
mST OF AUDIO VIDEO ENGINEERIN
LAWTON BUSINESS COLEGE
•MARINELLO BEAUTY SCHOOL
MIDLAND CAREER INSTITUTE
NATL TECHNICAL SCHOOL
NATIONAL BROADCASTING
Amount
$695.00
$3,170.00
$3,032.00
S7.090 00
$2,937.00
51,596.00
S2.552.00
$29,430.00
$8,308.00
$51,287.00
$7,173.00
$9,611.00
$10,622.00
$500.00
$189,645.00
$22,355.00
$20,517.00
$7,165.00
$5,177.00
$7,264.00
$16,545.00
$19,355.00
241
School
NATIONAL CAREER COLLEGE
NATIONAL TECHNICAL COLLEGE
OAKLAND COLLEGE COURT REPORTIN
OXNARD BEAUTY COLLEGE
PACinC BEAUTY COLLEGE
PACIFIC COAST COLLEGE
PATRICIA STEVENS CAREER COLL
SOUTHWEST COLLEGE
STUDIO 7 FASION CAREER COLLEGE
THECAREER nv'STITUTE
TRANSWESTERN
UNIFIED SCHOOL OF AMERICA
UNILEX COLLEGE
UNIVERSAL BEAUTY ACADEMY
UNIVERSITY OF SOUND ARTS
USA UNIFIED SCHOOLS OF AMERICA
VAN NUYS COLLEGE OF BUSINESS
WILSHIRE COMPUTER COLLEGE
Amount
$1,586.00
$16,545.00
$10,677.00
$10,017.00
$653.00
$73,696.00 *
$1,207.00
$5,622.00 *
$7,503.00 *
$5,120.00
$2,550.00
$10,458.00 *
$905.00
$989.00
$14,483.00
$3,185.00
$3,185.00 *
$17,435.00 *
*School closure not financially related.
5611,842.00
242
lADE AMERICAN SCHOOLS
The audit staff of the Council for Private Postsecondary and Vocational Education conducted two
on-site audits of lADE American Schools. The following is a sununary of the areas found to
be out of compliance with the stamtory requirements of the California Education Code:
AUDIT VISIT MAY 12-14, 1993
lADE AUDIT REPORT ISSUED SEPTEMBER 8. 1993
REVIEW SUMMARY:
1. The Notice of Student Rights was not posted in the classrooms at die El Mome campus;
CEC Sectioo 94316.20(b)(c)
2. The studeitt was not provided books for the ESL course in a timely tisbion; CEC Section
94319.6(c)
3. Completion and Placement disclosure were incorrect: CEC Section 94316.10(2)(A)
4. ESL instructors lacked Certificates of Authorization and financial aid staff lacked
certificates; CEC Section 94311.1
5. The enroUment agreement indicated an additional charge for hours spent beyond the
contraa length; CEC Section 94316.28(h)
6. Prior knowledge, tHuning, or skills not adequately documented; C:EC Section 94316.28(f)
7. The student's record card contained omissions of course work completed: CEC Section
94319.5(2)
8. Discrepast social security number noted on file document^; CEC Section 94319.5(1)
9. Standard of Administrative Capability called into question due to the IRCA Pre-
Enrollment Appraisal for Basic English Competency Form 1 Examination being graded
incoirectly; CEC Section 94316.28
AUDIT RESPONSE ANALYSIS - INADEQUATE RESPONSES:
1. ESL instructor lacked certifications of authorization -
The instiwtion requested a waiver for the reqxiirement of three years experience in an
approved private postsecondary vocational instimtion for M' Sangiovanni; this request
was denied because the request violated state law.
2. Inadequate documentation of prior knowledge, training, or skills -
lADEpgl
243
The institution was directed to perform a portfolio review of all students enrolled or who
had started classes as of Jamiaiy 1, 1993 to determine whether there was adequate
documentation of prior knowledge, training or skills.
In their initial audit response, the institution did not follow the audit requirements. On
November 1 1 , 1993, the school was informed that their audit response was unacceptable.
They were instructed to perform the review and were provided with a list of criteria
spccifymg the exact documentation the Council would find acceptable for determining
prior knowledge, training, or skills. If such documentation could not be located in the
student's file, the school was to contact each student and collect the required information.
Failure to comply with an item of any studem required that the school make a full refund
of tuition and all fees to the student's account.
3. The smdent's academic summary profile sheet cootained omission of course work
completed -
The school was required to provide the date ibe Department of Infbxmaiion Systems
completed the system changes made to inchide bU four digits when printing credits earned
by the students in the Units 1, 2, 3 and 4.
A response to these outstanding issues was required by die close of business December 15. 1993.
The institution failed to respond satisftctorily.
AUDIT VISrr MAY 31 - JUNE 3, 1994
AUDIT REPORT ISSUED AUGUST 29. 1994
REVIEW SUMMARY:
1. The scope of the audit was testricted to several areas because information requested firom
the institution was either not provided, or was provided in a form odier than requested
by the auditors. The specific areas iiqpacted were: ' 1) documentation of prior
knowledge, training, or skills, 2) financial responsibility and 3) State pro-rata refunds.
2. The studem sample consisted of 100 student files from a list of 2,582 students; l3ae total
student-ipopulation of all lADE schools at the time of audit. This sample was later
increased by 10 for a total of 110 student files. Note, die instimtion failed to include 55
names &om the original student list.
3. Inadequate documentation of prior knowledge, training, or skills; CEC Section
94316.28(f) -
Based on the institution's failure to respond satisfactorily to this issue as addressed in the
Council's May 12-14, 1993 audit, an additional review was conducted to determine
whether the school had, at a minimim>. implemented, and were following, procedures to
capture the required documentation.
IADEpg2
244
Of the 110 student files reviewed, there were 28 files that did not contain any
documentation and 13 whose documentation was inadequate. Based on a 37 % error rate,
tiie school was instiucted. once again, to review its' total student population from January
1, 1993 to the present ensuring that adequate documentation of prior knowledge, training
or skills was obtained. For those students whom this documentation could not be
obtained, a refund of all tuition and fees paid was required. In addition, the school was
instructed to engage in the services of an independent Certified Public Accountant (CPA)
to attest to the instiomon's compiiaoce with this requirement and to the occurrence of the
refund payments to student accoutus when adnjuate documentation would not be
obtained.
Failure to provide financial infonnation, or to provide information in a timely feishion;
CEC Section 94316.6: CCR Section 73860(b)(4) -
The scope of ^ audit was limited by the instimtions failure to provide the following
requested information:
a. Accounting records for specific financial statement items
b. The trial balance provided for the year ending December 3, 1993 was
actually as of January 31, 1994, which the accountant adjusted backwards
to the financial statements date. The accountant's work papers regarding
the thai balance adjustments were requested, but not provided.
c. DetailrelatingtoanexpenseitemlistedontheJanuary 31, 1992 aid 1993
Schedule of General & Administrative Expenses totaling $9,993 and
$99,335 respectively. —
The institution made it clear that they perceived the accounting and financial reporting
systems in place to be deficient. A new computerized accounting system was scheduled
for fkill faaplementaiion by June 30, 1994, and prior yean reviewed financial statements
would be reissued by their newly hired accounting firm.
They were required to submit the detailed description of the expense items for the years
January 31. 1992 and 1993 of S9,993 and $99,335. respectively.
The institution failed to satisfy the financial responsibility requirements; CEC Section
94316.6 .
The institution's current ratio for the year ending January 31, 1993 was 1.02:1, and for
the year ending December 31. 1993U was 1.10:1. This was below die stamtory
requirement of 1.25:1.
As a result the school was placed on financial quarterly reporting.
The institution failed to provide requested information
relating to student refunds; CEC 94318.5
IADEpg3
245
A list of Students entitled to refunds for the period of May 14, 1993 to May 31, 1994
was requested. This data was not provided during the on site visit.
The school was required to provide a list of refunds payable as of June 3, 1994. A
spreadsheet detailing criteria needed to test the school's compliance and a copy of the
front and bade of negotiated checks was also required.
7. The institution failed to calculate refiuids in accordance with State pro rata requirements;
CEC 94318.5.
The school was computing state pro-rata refunds based on a percentage of course
completion rather than clock hours. They were instructed to perform a refund
reconstruction from January 1, 1993 to the present, applying the correct State pro rata
refund formula. Any additional refunds due students as a result of this reconstruction
were to be paid and proof of payment submitted. The services of a CPA were to be
engaged attesting to the instiution's compliance with die State statute.
8. The instiwtion failed to pay refijnds in a timely manner; CEC 94318(b).
In 12 of the 18 refund payments reviewed, payment exceeded the 30 days stamtory
requirement. The institution had indicated in writing that no refunds were due; however,
based on information tested, this statement was inaccurate.
9. Pell Grants funds were disbursed prior to the Electronic Student Aid Rqnrt Processing
date.
There were 8 cases observed where Pell Grant funds were posted to the student's ledger
account prior to the U.S. Department of Education's official ouq)ui document (ESAR)
date. This observation was referred to die U.S.D.E.*s Region DC, San Francisco.
10. Pell Grant funds were disbursed widiout confirmation of citizenship stams by the
Immigration and Naturalization Service (INS).
There were 3 cases where the ESAR documents indicated that die INS did not confiim
the studeM's statement as an eligible noncitizen and the required documentation from the
Department of Justice confinning the student's eligibility status could not be located in
the student's file. This observation was referred to the U.S.D.E's Region DC office in
San Francisco.
•AUDrr RESPONSE ANALYSIS • INADEQUATE RESPONSES:
The instimtion's response was dated November 23. 1994.
1 . Inadequate documentation of prior knowledge, training or skills.
lADE failed to comply with the required actions stipulated in the audit report.
IADEpg4
BOSTON PUBLIC LIBRARY
246 Hill
3 9999 05984 369 6
specifically, flie spreadsheet rq>ort was not prepared; the services of a OPA was not
engaged; evidence of refund payment to smdents lacking adequate documentation was
not provided. They did, however, state that the portfolio review had been conducted
and provided documentation to support their statement. A review of that
documentation concluded that, although provided with the guidelines for determining
adequate documematioii, there was still an error rate exceeding tbe 10% threshold for
noihcompliance.
The institution failed to pay refunds in a timely manner.
The institution acknowledged their failure to pay refunds within the statutory
guidelines (30 days from the date of withdrawal) but stated that due to 'uowamnted
actions" placing them on reimbursement with the U.S.D.E.. there were significant
cash flow problems. Consequently, they were frequently forced to choose between
meeting faculty and staff payroll, curtailing student services and equ^ment purchases
or remming smdent aid reftmds to the U.S.D.E. They chose to continue providing
education to students, planned to pay refunds after the instimtion had reestablished a
normal cash flow.
As such, the instimtion, while acknowledging their responsibility to promiitly reftmd
Title rv funds, continued to place its highest priority on smdents. Once the
Department of Education returned lADE to advance payment stams, their cash flow
lemmed to normal and the appropriate reftmd control procedures are fully reinstated.
Their response indicated that reftinds were presently being paid on a timely basis,
aldiough no such documentation was provided.
The instimtion failed to provide all tbe documentation requested during the audit.
The instimtion failed to provide the Council wiih a list of students entitled to refunds
^t had not been paid between the period of May 4, 1993 and May 31, 1994.
The required financial statements and related working papers were also not provided.
The reviewed financial statements submitted represented a period different from the
statements provided during the audit. There was no explanation as to why the actions
required in die audit report were not followed.
On October 3, 1994 lADE was granted a 60 day extension to respond to the audit
report, and they still failed to perform the required actions.
On January S, 1995, the CoancU responded to the additional informatioD provided by
lADE. Four audit findings were not resolved in lADE's re^>0Qse:
1. Inadequate documentation of prior knowledge, training or skills.
2. Failure to pay refunds in a timely manner.
3. Faihire to provide all documentation requested during the audit
IADEpg5
247
4. Failure to satisfy the finaiKial reqxmsibility requitcments.
On November 23, 1994 a copy of the Council's audit rqport and lADE's response was
forwarded to ±e U.S. Department of Education, Region DC.
On January 9, 1995, the Council requested assistance from die Attorney General's Office
regarding the institution's failure to respond to pertinent audit issues.
On February 3,1995, prompted by the Council's audit. ACCET performed an unannounced
visit to the South Gate campus aiul issued a Sbow-Canse directive.
On March 7, 1995. Council representatives attended a meeting sponsored by the U.S.
Department of Education. The purpose of the meeting was for the USDOE to gain all
available information prior to serving LADE widi search warrants and seizing school records.
lADE American S. hools ceased instruction and officially dosed all California schools on
March 13. 1995.
O
IADEpg6
*
ISBN 0-16-052791-0
780160"527913
90000
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